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The macroeconomics of fiscal consolidations in a monetary union: the case of Italy

Author

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  • Lorenzo Forni

    () (Bank of Italy)

  • Andrea Gerali

    () (Bank of Italy)

  • Massimiliano Pisani

    () (Bank of Italy JEL classification: E62, H63)

Abstract

We simulate the macroeconomic and welfare implications of different fiscal consolidation scenarios in Italy using a medium scale two-areas dynamic general equilibrium currency-union model. Differently from similar models, ours is rich in the terms of fiscal features. We assume distortionary taxes (on labor income, capital income and consumption) and welfare-enhancing public expenditure. We distinguish between public spending on final goods and services, public employment and transfers to households. The scenarios that we consider envisage a decreases in the public debt to GDP ratio of 10 percentage points in 5 years. Based on our simulations we find that: first, fiscal distortions are quantitatively significant; second, a consolidation strategy that reduces expenditure and simultaneously lowers tax rates has a positive effect on long-run GDP of 5% to 7% and on welfare of 4% to 7% of the initial levels, depending on the composition of the adjustment; third, consumption and investment are stable or grow on impact and along the path to the new steady state; finally, spillovers to the rest of the Euro area are expansionary and sizeable both in the long run and along the transition.

Suggested Citation

  • Lorenzo Forni & Andrea Gerali & Massimiliano Pisani, 2010. "The macroeconomics of fiscal consolidations in a monetary union: the case of Italy," Temi di discussione (Economic working papers) 747, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_747_10
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    Cited by:

    1. Serbanoiu, Georgian Valentin, 2012. "Transmission of fiscal policy shocks into Romania's economy," MPRA Paper 40947, University Library of Munich, Germany.
    2. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
    3. L. Marattin & M. Marzo, 2010. "The Multiplier-Effects of Non-Wasteful Government Expenditure," Working Papers 704, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2015. "Optimal fiscal and monetary policy action in a closed economy," Economic Modelling, Elsevier, vol. 48(C), pages 175-188.
    5. Benjamin Carton & Thibault Guyon, 2012. "Désendettement en union monétaire : un modèle structurel," Économie et Statistique, Programme National Persée, vol. 451(1), pages 131-153.
    6. Ana-Maria SÃNDICÃ, 2015. "The Role of Monetary and Fiscal Policies in Ensuring Macroeconomic Stability in Romania," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 18(1), pages 110-124, June.
    7. Bertrand Gruss & Jose L. Torres, 2012. "Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances," IMF Working Papers 12/38, International Monetary Fund.
    8. Antonio Bassanetti & Matteo Bugamelli & Sandro Momigliano & Roberto Sabbatini & Francesco Zollino, 2014. "The policy response to macroeconomic and fiscal imbalances in Italy in the last fifteen years," PSL Quarterly Review, Economia civile, vol. 67(268), pages 55-103.
    9. de Walque, Gregory & Lundvall, Henrik & Papageorgiou, Dimitris & Rysanek, Jakub & Kulikov, Dmitry & Júlio, Paulo & Lozej, Matija & Sideris, Dimitris & Maria, José R. & Micallef, Brian & Schmidt, Sebas, 2015. "Comparing fiscal multipliers across models and countries in Europe," Working Paper Series 1760, European Central Bank.
    10. Vito Tanzi, 2011. "The Return to Fiscal Rectitude After the Recent Escapade," Rivista di Politica Economica, SIPI Spa, issue 3, pages 253-277, JULY-SEPT.
    11. repec:ijc:ijcjou:y:2017:q:4:a:8 is not listed on IDEAS
    12. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2017. "Fiscal Consolidation in an Open Economy with Sovereign Premia and without Monetary Policy Independence," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 259-306, December.

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    Keywords

    fiscal consolidation; monetary union; distortionary taxation; general equilibrium models;

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