Assessing Policy Reforms for Italy using ITEM and QUESTIII

Abstract

In this paper we assess the implications of policy reforms for the Italian economy by jointly using the Italian Treasury Econometric Model (ITEM) and QUEST III, the endogenous growth dynamic general equilibrium (DGE) model of the European Commission (DG ECFIN) in the version calibrated for Italy. We point out some of the key differences between the two models, highlighting some policy insights that DGE models can provide compared to those of traditional macro-econometric models. Their structural characteristics and the results of simulations are analyzed by using an array of shocks commonly examined in the evaluation of possible reforms. We show that two elements incorporated into the QUEST model play a key role in explaining the qualitative and quantitative differences among the two models in the dynamic responses to structural shifts, namely: the role of expectations in the transmission of reforms and the endogenous growth mechanism. We conclude that the joint consideration of the two models can improve our understanding of how the assessment of policy interventions is likely to be affected by the uncertainty surrounding model-based evaluation.