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Public Debt and Economic Growth in Italy

Author

Listed:
  • Fabrizio Balassone

    (Banca d’Italia, Structural Economic Analysis Department)

  • Maura Francese

    (Banca d’Italia, Structural Economic Analysis Department)

  • Angelo Pace

    (Banca d’Italia, Structural Economic Analysis Department)

Abstract

In this paper we investigate the link between government debt-to-GDP ratio and real per capita income growth in Italy over 1861-2009. We model our regression analysis on a standard production function. Our results support the hypotheses of a negative relation between public debt and growth and of a stronger effect of foreign debt compared to domestic debt before World War I. The effect of public debt on growth appears to work mainly through reduced investment. These results help explain the different reaction of per capita GDP growth to the debt-ratio over 1880-1914 (when the negative correlation between the two variables is particularly strong) and 1985-2007 (when the correlation appears to break down when debt starts declining). A descriptive analysis of fiscal policy in these two periods suggests that differences in the timing of fiscal consolidation as well as in the size and composition of the budget are additional explanatory factors.

Suggested Citation

  • Fabrizio Balassone & Maura Francese & Angelo Pace, 2011. "Public Debt and Economic Growth in Italy," Quaderni di storia economica (Economic History Working Papers) 11, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:workqs:qse_11
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/quaderni-storia/2011-0011/index.html
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    public debt; economic growth; Italian economic history;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • N0 - Economic History - - General

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