The decline in Italian productivity: a study in estimation of Total Factor Productivity with panel cointegration methods

The main aim of this paper is to propose a method for obtaining estimates of Total Factor Productivity (TFP) trends (i) free from the restrictive assumptions needed by traditional growth accounting and (ii) requiring only data on inputs and output flows. The approach proposed relies on recent developments in the analysis of non-stationary dependent panels. The ap- plication to the Italian economy for the period 1981-2004, consistently with those obtained through traditional growth accounting methods, supports the view that the decline in Italian labour productivity has been mostly due to a widespread fall in TFP growth. A simple regression points as main causes of this fall the completion of a factor reallocation process among industries and capital types.