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Sustainability and Determinants of Italian Public Deficits before and after Maastricht

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  • Emma Galli
  • Fabio Padovano

Abstract

This paper has two goals. 1) To evaluate the sustainability of Italian public deficits according to the methodology developed by Trehan and Walsh (1988, 1991) and Bohn (2004); 2) To analyze how the determinants of debt creation evolved in the years following the Maastricht Treaty and how this evolution shaped the development of the Italian public finances. The analysis is carried out in three steps; first we estimate and compare the stochastic properties of the main indicators of the Italian budget performance to test for sustainability; second, we confront the results of a cointegration-vector error correction model on two sample periods: a “pre Maastricht” (1950-1991) and a “post Maastricht” (1950-2002), to identify the main determinants of public deficits, according to the theoretical literature and the dynamic relationship between each of them and the dependent variable; third, we use the results of these estimates to specify a dummy variable model that evaluates how Italian fiscal policy reacted to changes in these determinants in the 1950-2002 sample. We conclude that a) In this period Italian public finances failed the sustainability test; b) Debt creation is much more sensitive now than before 1991 to external constraints, chiefly the numerical rules imposed by the Maastricht Treaty itself, institutional factors, such as the budget approval rules and the relative political power of the Minister for the Economy.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1391.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1391

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Keywords: public deficits; Maastricht Treaty; comparative test; cointegration;

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References

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  1. Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C96-075, University of California at Berkeley.
  2. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, Elsevier, vol. 39(3-4), pages 771-779, April.
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Cited by:
  1. Kahnim Farajova, 2011. "Budget Deficit and Macroeconomics Fundamentals: The case of Azerbaijan," International Journal of Economic Sciences and Applied Research (IJESAR), Technological Educational Institute (TEI) of Kavala, Greece, vol. 4(2), pages 143-158, August.
  2. Gabriella Deborah Legrenzi & Costas Milas, 2010. "Spend-and-Tax Adjustments and the Sustainability of the Government's Intertemporal Budget Constraint," CESifo Working Paper Series 2926, CESifo Group Munich.
  3. Piergallini, Alessandro & Postigliola, Michele, 2011. "Fiscal Policy and Public Debt Dynamics in Italy," MPRA Paper 28200, University Library of Munich, Germany.

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