The Italian economic decline in a Kaldorian theoretical perspective

By Guglielmo Forges Davanzati, Rosario Patalano, Guido Traficante

PKES Working Paper 1606

March 2016

This paper analyses the Italian economic decline in a Kaldorian theoretical framework. On the theoretical ground we propose an interpretation of the Italian economic decline based on the continuous decline of domestic demand and the constant reduction of the rate of growth of labour productivity. This interpretation is consistent with the concept of decline, which involves a long-run perspective. We also consider the role of the banking sector as a factor driving aggregate demand and, in turn, labour productivity. We estimate a VAR for the period 2002-2015 to analyse jointly the evolution of public consumption, real GDP, private investments, credit supply, labour compensation and productivity. Our main empirical finding is that aggregate demand and credit supply significantly affect the path of labour productivity, consistently with Kaldor's second law.

Keywords: Kaldor, Italy, aggregate demand, labour productivity

JEL classification: B52 E12 E60