Testing public debt sustainability with time-varying volatility: The case of Italy, 1861–2024

This paper investigates the long-run dynamics and sustainability of the Italian public debt-to-GDP ratio from 1861 to 2024. To address the presence of non-stationary volatility, we employ the recently developed Time-Transformed Test methodology proposed by Kurozumi et al. (2023). By utilizing the cumulative variance profile this approach homogenizes volatility across the time domain, ensuring the asymptotic validity of the STADF and GSTADF statistics and overcoming the size distortions inherent in standard recursive unit root tests. Our empirical findings confirm multiple explosive ‘bubble’ episodes in Italy’s fiscal history, specifically identifying three critical periods of exuberance: the 1913 anticipatory wartime shock, the 1978–1998 structural imbalance, and the 2020 exogenous pandemic-induced spike. While the 1978–1998 episode represents a unique two-decade era of structural divergence sustained by high private savings and debt monetization, the 2020 episode is identified as a temporary yet significant systemic shock. The study demonstrates that accounting for the evolution of the variance profile is imperative for a reliable fiscal analysis, offering an early-warning benchmark for monitoring modern debt-stabilization rules and evaluating Italy’s current fiscal resilience amidst rising debt projections for 2025–2026.