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Growth vs. Discipline: Italy's Fiscal Dilemmas in a Stock-Flow Consistent Model

Author

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  • Francesco Zezza
  • Gennaro Zezza

Abstract

This paper investigates the implications of the European Union's revised fiscal governance framework for Italy, a country facing the dual challenge of high public debt and persistent economic stagnation. Using a Stock-Flow Consistent (SFC) macroeconometric model of the Italian economy (MITA), we assess the medium-term macroeconomic implications of the government Medium-term Fiscal-Structural Plan, and whether it aligns with debt stabilization and economic recovery goals. We show how the government expenditure path, consistent with the new Debt Sustainability Analysis, leads instead to an increase in debt/GDP. We perform alternative fiscal policy scenarios (higher/lower spending; higher/lower direct tax rate; and a policy mix of higher spending and higher tax rate) and look at the effects on growth and debt sustainability. Results highlight the trade-offs inherent in adhering to the revised fiscal rules, particularly the tension between achieving long-term debt reduction and supporting growth.

Suggested Citation

  • Francesco Zezza & Gennaro Zezza, 2025. "Growth vs. Discipline: Italy's Fiscal Dilemmas in a Stock-Flow Consistent Model," Economics Working Paper Archive wp_1082, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_1082
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    Keywords

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    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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