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Fiscal Policy and Public Debt Dynamics in Italy

Author

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  • Piergallini, Alessandro
  • Postigliola, Michele

Abstract

We examine the historical dynamics of government debt in Post-Unification Italy, from 1861 to 2009. Unit root tests for the debt-GDP ratio are unable to reject either the non stationarity or the stationarity null hypothesis. Controlling debt dynamics for fiscal feedback policies of the Barro-Bohn style, however, the debt-GDP ratio is found to be mean-reverting. Mean-reversion in the debt-GDP ratio is due not only to a nominal growth dividend, but also to a positive response of primary surpluses to variations in outstanding debt. There is indeed significant evidence that, over the history of Italy, fiscal policy makers have reacted to the accumulation of debt, taking corrective measures to rule out potential long-term sustainability problems.

Suggested Citation

  • Piergallini, Alessandro & Postigliola, Michele, 2011. "Fiscal Policy and Public Debt Dynamics in Italy," MPRA Paper 28200, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28200
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    File URL: https://mpra.ub.uni-muenchen.de/28200/1/MPRA_paper_28200.pdf
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    References listed on IDEAS

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    1. Mendoza, Enrique G. & Ostry, Jonathan D., 2008. "International evidence on fiscal solvency: Is fiscal policy "responsible"?," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1081-1093, September.
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    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    5. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, June.
    6. Emma Galli & Fabio Padovano, 2005. "Sustainability and Determinants of Italian Public Deficits before and after Maastricht," CESifo Working Paper Series 1391, CESifo Group Munich.
    7. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
    8. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
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    More about this item

    Keywords

    Fiscal Policy; Public Debt; Fiscal Sustainability.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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