Permanent disinflationary effects on unemployment in a small open economy: Italy 1979-1995

The aim of this paper is to investigate the effects on the rate of unemployment of the disinflationary policies and other aggregate demand shocks which affected the Italian economy during the period 1979-1995. To this end, a structural cointegrated VAR model is built and the structural disturbances are recovered by imposing a set of short-run, contemporary restrictions. The results show that both short-run and long-run movements in unemployment are influenced by disturbances to aggregate demand, as well as by supply shocks. This evidence seems to be at odds with the predictions of “natural-rate” theories.