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Public Debt and Economic Growth in Italy

Author

Listed:
  • Fabrizio Balassone

    () (Bank of Italy)

  • Maura Francese

    () (Bank of Italy)

  • Angelo Pace

    () (Bank of Italy)

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
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    References listed on IDEAS

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    Cited by:

    1. repec:rss:jnljef:v3i2p1 is not listed on IDEAS
    2. Alfred Greiner, 2015. "Public Debt, Productive Public Spending and Endogenous Growth," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 520-535, December.
    3. Felice, Emanuele & Vecchi, Giovanni, 2015. "Italy’s Modern Economic Growth, 1861–2011," Enterprise & Society, Cambridge University Press, pages 225-248.
    4. Dieppe, Alistair & Mourinho Félix, Ricardo & Marchiori, Luca & Grech, Owen & Albani, Maria & Other contributors & Kulikov, Dmitry & Papadopoulou, Niki & Sideris, Dimitris & Irac, Delphine & Gordo Mora, 2015. "Public debt, population ageing and medium-term growth," Occasional Paper Series 165, European Central Bank.
    5. Patrizia Battilani & Emanuele Felice & Vera Zamagni, 2014. "The value-added of service industry 1861-1951: the new series at current prices and first interpretations," Quaderni di storia economica (Economic History Working Papers) 33, Bank of Italy, Economic Research and International Relations Area.
    6. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2016. "Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries," European Economic Review, Elsevier, vol. 88(C), pages 158-184.
    7. Francesco Forte & Cosimo Magazzino, 2014. "Optimal size of governments and the optimal ratio between current and capital expenditure," Chapters,in: A Handbook of Alternative Theories of Public Economics, chapter 15, pages 342-367 Edward Elgar Publishing.
    8. Arusha Cooray & Marcella Lucchetta & Antonio Paradiso, 2013. "A knowledge economy approach in empirical growth models for the Nordic countries," Economics Working Papers wp13-06, School of Economics, University of Wollongong, NSW, Australia.
    9. Dreger, Christian & Reimers, Hans-Eggert, 2013. "Does euro area membership affect the relation between GDP growth and public debt?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 481-486.
    10. Irina Bilan & Iulian Ihnatov, 2015. "Public Debt and Economic Growth: A Two-Sided Story," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 4(2), pages 24-39, June.
    11. Silvana Bartoletto & Bruno Chiarini & Elisabetta Marzano, 2012. "The Sustainability of Fiscal Policy in Italy: A Long-Term Perspective," CESifo Working Paper Series 3812, CESifo Group Munich.
    12. repec:psl:moneta:2017:13 is not listed on IDEAS
    13. John Farrugia & Owen, Grech, 2013. "Assessing the sustainability of Maltese government debt," CBM Working Papers WP/04/2013, Central Bank of Malta.
    14. Arusha Cooray & Antonio Paradiso, 2012. "The level and growth effects in empirical growth models for the Nordic countries: A knowledge economy approach," CAMA Working Papers 2012-36, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Eunji Kim & Yoonhee Ha & Sangheon Kim, 2017. "Public Debt, Corruption and Sustainable Economic Growth," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-30, March.
    16. Mario Sarcinelli, 2012. "Euro crisis or public debt crisis? With a remedy for the latter case," PSL Quarterly Review, Economia civile, vol. 65(262), pages 215-236.
    17. Magazzino, Cosimo, 2012. "Wagner versus Keynes: Public spending and national income in Italy," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 890-905.
    18. Gordon L. Brady & Cosimo Magazzino, 2017. "The Sustainability of Italian Public Debt and Deficit," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(1), pages 9-20, February.
    19. Markus Eberhardt, 2013. "Nonlinearities in the Relationship between Debt and Growth: Evidence from Co-Summability Testing," Discussion Papers 2013/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    20. Silvana Bartoletto & Bruno Chiarini & Elisabetta Marzano, 2013. "Is the Italian Public Debt Really Unsustainable? An Historical Comparison (1861-2010)," CESifo Working Paper Series 4185, CESifo Group Munich.
    21. Michele Fratianni & Antonio Maria Rinaldi & Paolo Savona, 2013. "Una proposta per ridurre il fardello del debito pubblico italiano," Mo.Fi.R. Working Papers 81, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    22. repec:ecb:ecbops:2014165 is not listed on IDEAS

    More about this item

    Keywords

    public debt; economic growth; Italian economic history;

    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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