Abstract

This paper proposes a multisectoral model to investigate bottlenecks in Italian industry and their macroeconomic impact. We use highly disaggregated measures of capacity utilization rate, data on inter-sectoral transactions and linear programming techniques. According to our results, binding supply constraints have been experienced in the period 1981-1995 by several manufacturing branches, which produce mainly intermediate goods. The impact on output and import growth has been found to be significant. We also provide a shifting-weight analysis of inflation imported through foreign inputs in the presence of bottlenecks. Finally, we used our results on capacity constraints to investigate econometrically the inflationary impact of demand pressure through markups. The results suggest that a key variable in explaining producer price dynamics is not the average pressure of demand in the economy, but rather its level in critical sectors.