Persistent supply shocks drove Italy's investment weakness
Persistent supply shocks dominated Italy's investment weakness in 2008–2019, while demand drove the post-pandemic recovery. Lorenzo Mori and Tiziano Ropele report these findings in Bank of Italy paper No. 1072, published October 13, 2026.
Two recessions, different legacies
Persistent supply shocks explain most of Italy's output and investment weakness in 2008–2019.
In the pre-pandemic model, a one-standard-deviation adverse permanent supply shock lowers GDP by about 1.0 percent and raises prices by 0.3 percent.
Investment falls 2.5 percent after ten quarters.
Permanent demand shocks lower GDP by 0.7 percent and investment by about 1.0 percent.
Demand factors dominate the 2020–2025 recovery, supported by fiscal stimulus, NextGenerationEU and the Superbonus 110 percent renovation incentive.
Negative supply shocks around the energy crisis do not constitute another prolonged deterioration in productive capacity.
Temporary demand shocks restrain investment from late 2022; permanent demand contributions turn negative from 2023.
Capital and debt amplify losses
The Bayesian structural VAR uses quarterly data from Q1 1996 to Q2 2025, combining short-run sign and long-run zero restrictions.
The full-sample model adds energy prices and adjusts pandemic volatility.
Supply shocks correlate 0.53 and 0.37 with two productivity measures and 0.90 with identified technology shocks.
Panel local projections across about twenty manufacturing sectors find larger, longer supply-driven losses in capital-intensive industries and those exposed to short-term debt.
Demand responses are initially stronger but less persistent; confidence bands are 68 percent.
Persistence changes the policy diagnosis
The authors warn that misidentifying cyclical and structural shocks can produce lasting policy errors.
Supply losses and demand-induced hysteresis also affect estimates of the natural interest rate.
Interpretation remains conditional on identification restrictions, with an unidentified pandemic residual.
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