Sustainability of Italian budgetary policies: a time series analysis (1862-2013)

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Published: Dec 31, 2017

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Gordon L. Brady
Department of Economics, Bryan School of Business and Economics, University of North Carolina
United States
Cosimo Magazzino
Roma Tre University
Italy
Vol. 6 No. 2 (2017), Articles, pages 126-145
DOI: https://doi.org/10.17979/ejge.2017.6.2.4326
Submitted: Sep 24, 2018 Published: Dec 31, 2017
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Abstract

In this paper, we analyze the sustainability of Italian public finances using a unique database covering the period 1862-2013. This paper focuses on empirical tests for the sustainability and solvency of fiscal policies. A necessary but not sufficient condition implies that the growth rate of public debt should in the limit be smaller than the asymptotic rate of interest. In addition, the debt-to-GDP ratio must eventually stabilize at a steady-state level. The results of unit root and stationarity tests show that the variables are non-stationary at levels, but stationary in first-differences form, or I(1). However, some breaks in the series emerge, given internal and external crises (wars, oil shocks, regime changes, institutional reforms). Therefore, the empirical analysis is conducted for the entire period, as well as two sub‐periods (1862‐1913 and 1947‐2013). Moreover, anecdotal evidence and visual inspection of the series confirm our results. Furthermore, we conduct tests on cointegration, which evidence that a long-run relationship between public expenditure and revenues is found only for the first sub-period (1862-1913). In essence, the paper’s results reveal that Italy have sustainability problems in the Republican age.

Keywords:

public finance, sustainability, ARDL, Italy

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