Real and Nominal Sides of Disaggregated Economies: The Estimation of a NKPC at Italian Regional Level

This paper explores, within a NKPC context, whether the traditional regional dualism of the Italian economy has a counterpart in terms of degree of price inertia. When the model is estimated unrestrictedly, results are unsatisfactory because of implausible discount rate values. Conversely, fixing the discount rate to one, things get much better: the “deep” parameters of the model are significant for the vast majority of regions and have the right signs and expected magnitudes. We also find a significant role for the backward-looking component in the inflation equation. National homogeneity of structural parameters is however widely rejected, whereas regions cluster according to the classical North-Centre and South partition of the country. Statistically comparing structural and closed-form parameters, we find confirmation of a significant weight for the backward-looking component found in the estimation of the restricted hybrid model.