The post-2007 developments in the italian economy. A counterfactual analysis with the item model

To analyse the macroeconomic dynamics in the Italian economy in the post-2007 period we conduct a counterfactual analysis using the econometric model of the Italian Treasury (ITEM). This allows us to assess on quantitative grounds the relevance of the different channels of the post-2007 recessions and to appraise how well the model performed in tracking the observed developments after 2007. We find that the forecasts errors over the horizon 2008–2014 mostly reflect the assumptions on the path of the exogenous variables made before the crisis erupted. We also show that the sharp fall in world demand in 2008–09, the post-2010 worsening of financial conditions in coincidence with the sovereign crisis and the severe post-2010 fiscal contraction account for a large fraction of the observed drop of GDP.