Italian Labour Frictions and Wage Rigidities in an Estimated DSGE

This paper investigates how Italian labour market institutions influence business cyclefluctuations. We apply a DSGE model that features Italian labour market rigidities and weestimate the latter on Italian data using Bayesian techniques to assess the effects of demand,supply, and labour market shocks on the macroeconomy, and to measure their significance foreconomic fluctuations. Our results show: First, technology, time preference and wage bargainingshocks are key drivers of economic fluctuations across horizons. Second, matching efficiencyand wage bargaining shocks are significant sources of unemployment and vacancies fluctuationsbut their role is limited for output fluctuations. Third, labour market relaxation policies have onlymarginally contributed to the reduction in unemployment. Last, accounting for wage rigiditiesinfluences labour market dynamics and helps the model to fit data well. We, therefore, urgepolicymakers to support additional changes in labour market institutions