Time-varying competitiveness shock absorption in Italy

This paper analyzes the changes over time of the intra-EU competitiveness shock absorption in Italy, checking whether structural changes occurred over time. Using a time-varying Bayesian VAR identified with mixed sign and zero restrictions, we find that adjustment through Unit Labor Cost seems to be predominant after the 2008 crisis and, to a lesser extent, between the end of the European Monetary System and the start of the EMU. The share of a competitiveness shock absorbed through the trade balance has increased with the EMU. Adjustment through the income channel seems to be the main absorbing channel during the EMS period, the first years of the single currency and during the crisis itself. Finally, there is a trade-off in the magnitude between the response of ULC and GDP.