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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.

Suggested Citation

  • Emma Galli & Fabio Padovano, 2005. "Sustainability and Determinants of Italian Public Deficits before and after Maastricht," CESifo Working Paper Series 1391, CESifo.
  • Handle: RePEc:ces:ceswps:_1391
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    References listed on IDEAS

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    1. Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
    2. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
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    Cited by:

    1. Piergallini, Alessandro & Postigliola, Michele, 2011. "Fiscal Policy and Public Debt Dynamics in Italy," MPRA Paper 28200, University Library of Munich, Germany.
    2. Kahnim Farajova, 2011. "Budget Deficit and Macroeconomics Fundamentals: The case of Azerbaijan," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 4(2), pages 143-158, August.
    3. 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.
    4. Buiatti, Cesare & Carmeci, Gaetano & Mauro, Luciano, 2014. "The origins of the public debt of Italy: Geographically dispersed interests?," Journal of Policy Modeling, Elsevier, vol. 36(1), pages 43-62.

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    Keywords

    public deficits; Maastricht Treaty; comparative test; cointegration;
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