Divergent Sectorial Paths in Productivity and Long-term Inflation

The relationship between inflation and relative price variability (RPV) has been observed since the last century; recently, the subject has inspired much theoretical and empirical work. It has been claimed that relative price variability plays an autonomous role not only with respect to the aggregate inflation rate, but also with respect to the GDP growth rate, the interest rate and the monetary growth rate. We have developed an input-output (IO) model integrating real and cost-prices, which can accommodate different values of input substitution elasticities according to changes in relative prices, to explore the nature of this relationship in the Italian case. Our IO approach and the results show first, that the relationship also occurs at the structural level, and second, that the causal mechanism of the relationship involves divergent trends in sectorial productivity, with the following crucial factors: the adjustment of the compensation to productivity due to the primary factors, the substitution of factors by sector in response to the relative price, and the effect on final demand of the prices of goods and services. Moreover, our findings seem to suggest a potential risk of counter-intuitive effects of supply-side economic policies, since as well as enhancing sectorial productivity they also hinder potential system flexibility at the national and international levels.