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 under different Exchange Rate Mechanisms and with the crisis. By using a time-varying Bayesian VAR identified with mixed sign and zero restrictions, we find that the share of a competitiveness shock absorbed through the trade balance in Italy, has permanently increased with the EMU. Adjustment through Unit Labor Cost and wage devaluation seems to be predominant after the 2008 crisis, and, to a lesser extent, between the end of European Monetary System and the start of 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.