the macroeconomics of europe 2020 reform strategy and the
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Working Papers
N° 8 - October 2011
Ministry of Economy and Finance
Department of the Treasury
ISSN 1972-411X
The Macroeconomics of Europe 2020 Reform Strategy and the Potential Effects
on the Italian Economy
Barbara Annicchiarico, Fabio Di Dio, Francesco Felici
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Working Papers
The working paper series promotes the dissemination of economic research produced in the Department of the Treasury (DT) of the Italian Ministry of Economy and Finance (MEF) or presented by external economists on the occasion of seminars organized by MEF on topics of institutional interest to the DT, with the aim of stimulating comments and suggestions. The views expressed in the working papers are those of the authors and do not necessarily reflect those of the MEF and the DT.
Copyright: ©
2011, Barbara Annicchiarico, Fabio Di Dio, Francesco Felici. The document can be downloaded from the Website www.dt.tesoro.it and freely used, providing that its source and author(s) are quoted.
Editorial Board: Lorenzo Codogno, Mauro Marè, Libero Monteforte, Francesco Nucci, Franco Peracchi
Organizational coordination: Marina Sabatini
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CONTENTS
1 INTRODUCTION .................................................................................................................... 3
2 QUEST III WITH R&D: MODEL SETUP AND CALIBRATION ............................................. 6
2.1 HOUSEHOLDS AND WAGE SETTING .................................................................................... 7
2.2 FINAL GOODS SECTOR ...................................................................................................... 9
2.3 INTERMEDIATE GOODS SECTOR AND THE R&D SECTOR .................................................... 10
2.4 FOREIGN SECTOR, MONETARY AND FISCAL AUTHORITIES ................................................. 11
2.5 CALIBRATION .................................................................................................................. 12
3 THE EUROPE 2020 STRATEGY AND REFORM SCENARIOS ........................................ 13
3.1 POLICY AREAS AND QUEST III VARIABLES ...................................................................... 13
3.2 SCENARIOS .................................................................................................................... 15
4 SIMULATION RESULTS ..................................................................................................... 16
4.1 LONG-RUN EFFECTS OF STRUCTURAL REFORMS ................................................................ 16
4.2 TRANSITIONAL DYNAMICS AND EFFECTS OF SINGLE INTERVENTIONS .................................... 18
5 CONCLUSIONS ................................................................................................................... 19
REFERENCES .......................................................................................................................... 20
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The Macroeconomics of Europe 2020 Reform Strategy and the Potential Effects
on the Italian Economy1
Barbara Annicchiarico (), Fabio Di Dio (
) e Francesco Felici (
)
Abstract
This paper studies the potential effects on the Italian economy of various reform
packages in the spirit of the Europe 2020 strategy. Using the European Commission’s
model QUEST III with R&D calibrated to match important features of the Italian
economy, we provide a quantitative assessment of the possible effects in terms of
growth, employment, sustainability of public finances and external imbalances of
several knowledge-oriented, labor and product market reforms. We observe that labor
market reforms are likely to bring about sizable long-run gains in output and
employment and that most of these gains accrue to low skilled workers, while real
wages tend to increase especially for high skilled workers. Some interventions are likely
to have some transitional costs as they give rise to a temporary decline in consumption
and/or employment, but the simultaneous implementation of all reforms may tend to
mitigate these effects already in the medium run. As a result of higher growth, in the no
costly reform scenarios, the public debt-to-GDP ratio declines substantially. However,
the analysis shows that non-budget neutral structural reforms may have considerable
side effects on the external imbalances.
JEL classification: E10, E60, E47.
Keywords: Europe 2020, Structural Reforms, Simulation Analysis, Italy.
1 We are very grateful to Werner Roeger, Janos Varga and Jan in’t Veld for sharing with us many invaluable insights
about their model, QUEST III. We also thank an anonymous referee, Alexandr Hobza and Gilles Mourre and the
participants to the LIME Modelling Workshop 2010 and to the EcoMod2011 conference for useful comments.and
suggestions on an earlier version of this paper. The usual disclaimer applies. The views expressed herein are those of
the authors and not necessarily reflect those of the Italian Ministry of Economy and Finance..
() University of Rome “Tor Vergata”, Department of Economics, Via Columbia 2, 00133 Roma, Italy.
Phone: +390672595731. E-mail: [email protected].
() Consip S.p.A., Department of Public Finance, Macroeconomic Modelling Unit. E-mail: [email protected].
() Italian Ministry of Economy and Finance, Department of the Treasury, Economic and Financial Analysis and
Planning Directorate. E-mail: [email protected]
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