Italian economy faces wide output gap, challenging economic policy decisions.
The article estimates the gap between actual and potential output in the Italian economy using different models. The researchers found that the estimates of the output gap and potential output varied widely depending on the model used. Models that were effective before the economic crisis lost their accuracy afterward. The study suggests that economic policy decisions should be based on flexible models that can adapt to different economic conditions and include measures of error. The median value of the output gap estimates performed better in predicting inflation than individual models. The Italian output gap was wider than European Commission estimates and close to those of the International Monetary Fund.