euro-indicators working group - circabc.europa.eu filepreliminary estimation of the single block (2...

Eurostat – Unit C4 Key indicators for European policies

Euro-indicators Working Group

Luxembourg,11th & 12th June 2012

Eurostat – Unit C4 Key indicators for European policies

Item 9.2 of the Agenda

The new ISTAT forecasting

activities

By Fabio Bacchini

Doc 345/12

IntroductionMEMo-ItDiffusion

Conclusion

The new Istat forecasting activities

Bacchini, Bovi, Brandimarte, Crivelli, De Santis, Fioramanti,Gilardi, Golinelli, Jona-Lasinio, Mancini, Pappalardo, Rossi,

Ventura, Vicarelli

Econometric Studies and Economic Forecasting Division

EurostatLuxembourg 12 June 2012

12 June 2012 Istat forecasting activity


Conclusion

Ouline

1 Introduction

2 MEMo-It

3 Diffusion



Conclusion

Why Istat forecasting activity

In 2011 - Isae (National Institute for Economic Analysis)became part of Istat

Isae funtions moved to Istat

forecasting activity : EZEO; price; Italy’s economic outlook



Conclusion

Ezeo



Conclusion

General framework



Conclusion

New Istat organization



Conclusion

Macro Econometric Model for Italy (MEMo-It)

Sep. 2011 collaboration with prof. Roberto Golinelli

Nov. 2011 Econometric Studies and Economic ForecastingDivision

Jan. 2012 internal seminars



Conclusion

Intranet - Sep



Conclusion

Data

Chinese walls

annual data

preliminary test (NA till 2010 Nace 1.1)

link ai template che CN invia ad Eurostat

new data set updated on regular basis

back-casting 1992

final input



Conclusion

Data



Conclusion

MEMo-Itcharacteristics

new-keynesian inspiration economic growth is driven fromdemand side in the short-run

in the long-run potential output is the equilibrium

in the short-run disequilibrium from potential output arerelated to movement in prices



Conclusion

MEMo-Iteconometric approach

identification of the main block supply side (potential output),consumption, price, foreign sector, government, labourmarkets, Phillips curve

preliminary estimation of the single block (2 stages)

final estimation of the model (3 stages) looking at the qualityof the forecast in the sample



Conclusion

MEMo-Itnumbers

186 variables - 121 endog.

52 endogene related to behavioral equation

69 identity

65 exogenous

9 scenario (exchange rate, oil-price, world growth)



Conclusion

MEMo-It: supply side

Cobb-Douglas production function (Dg-Ecfin)

potential output

capital stock elaboration (without residential stock)

TFP



Conclusion

MEMo-It TFP

!

8

SECTION 1 : A SHORT OVERVIEW OF THE OVERALL PRODUCTION FUNCTION APPROACH

1.1 Main Features of Methodology2 Instead of making statistical assumptions on the time series properties of trends and their

correlation with the cycle, the production function approach makes assumptions based on

economic theory. This latter approach focuses on the supply potential of an economy and has

the advantage of giving a more direct link to economic theory but the disadvantage, as

explained earlier, is that it requires assumptions on the functional form of the production

technology, returns to scale, trend technical progress (TFP) and the representative utilisation

of production factors. As shown in the diagram below, with a production function, potential

GDP can be represented by a combination of factor inputs, multiplied with the technological

level or total factor productivity (TFP). The parameters of the production function essentially

determine the output elasticities of the individual inputs, with the trend components of the

individual production factors, except capital, being estimated. Since the capital stock is not

detrended, estimating potential output amounts therefore to removing the cyclical component

from both labour and TFP.

2

This PF methodology is applicable to all of the "old" EU15 member states, with these 15 countries accepting the use of the PF approach as

the reference method for the assessment of their stability and convergence programmes. The HP filter approach is only used as a “back-up”

method and only for a short (unfortunately still to be defined) transition period. A modified PF methodology is applicable to all 12 of the

”new” Member States - in parallel with the HP filter approach. This modified PF framework tries to overcome a number of serious statistical

problems associated with the availability of only short time series for the new Member States. A common starting date of 1995 was imposed

for all 12 countries since too many transitional issues were biasing the pre-1995 data. The main modifications to the methodology, relative to

that which applies to the EU15 countries, include firstly, a simpler NAIRU methodology based on wage elasticities (it was not possible to

use the more sophisticated Kalman Filter based approach applied to the “old” Member States); secondly, trend TFP is generally estimated

using a moving average based, stochastic trend, approach (compared with the proposed new Kalman filter method which will be used for the

EU15 countries); and finally, the capital stock is estimated using a capital/output ratio which is fixed in the base year of 1995.



Conclusion

MEMo-It TFP



Conclusion

MEMo-It Demand



Conclusion

MEMo-It price

persistencedemand shockproductivity shocksGal̀ı e Gertler, 1999 (backward expectation)



Conclusion

MEMo-It labour

from production functionHamermesh 1996 e 1999supply related to gender partecipation rate



Conclusion

MEMo-It institutional sector

government

external block

families



Conclusion

MEMo-It at work



Conclusion

Key elements

define a new diffusion area

time: 2 release; first one 22 May together with the AnnualReport; second one 5 Nov.

3 documents: short presentation of results (5 pages),methodological note (14 pages), tutorial with simulationresults (to be released in November)



Conclusion

Principal diffusion area



Conclusion

New area



Conclusion

Example tutorial



Conclusion

MEMo-It: results



Conclusion

next steps

next release 5 Nov.

relation between short-run model and annual model

improvements on supply side

tutorial (general how to communicate forecasting activity)



Conclusion

MEMo-It: conclusion


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