The Italian Treasury Econometric Model (ITEM)

In this paper, we provide a description of the Italian Treasury Econometric Model (ITEM). We illustrate its general structure and model properties, especially with regard to the economy's response to changes in policy and in other dimensions of the economic environment.One of the key features of the model is the joint representation of the economy on both the demand and the supply sides. Since it is designed for the needs of a Treasury Department, its public finance section is developed in great detail, both on the expenditure and revenue sides. It also features a complete modeling of financial assets and liabilities of each institutional sector. After documenting the model structure and the estimation results, we turn to the outcomes of model simulation and ascertain the model properties. In ITEM the shocks that generate permanent effects on output are associated with: a) variables that affect the tax wedge in the labor market and the user cost of capital; b) labor supply change; and c) variation in the trend component of TFP (technical progress). By contrast, demand shocks have only temporary effects on output.