The demand for imports in Italy: A production analysis

Abstract

As economic integration continues, the countries of southern Europe struggle to promote economic growth while keeping unemployment and national budget deficits at acceptable levels. The economic effects of integration are explored for Italy by estimating demand elasticities for capital, labor, and imported inputs in the context of an aggregate cost function. Our results are consistent with each input pair being substitutes, although domestic capital and labor are closer substitutes than imports and domestic inputs. A high elasticity of inverse output supply of investment goods relative to labor price suggests that Italian labor market reforms are critical to future domestic capital goods production and national growth.