The Sustainability of Italian Public Debt and Deficit

What is it about?

In this paper, we analyse the sustainability of Italian public debt using a unique database, reconstructedbyForte(2011),whichcoverstheyears1862–2013.Thestudyfocuses on empirical tests for the sustainability and solvency of Italian public finance. The results of unit root and stationarity tests showthat public debt and deficit 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). In essence, the paper’s results reveal that Italy has sustainability problems in theRepublican age (1947-2013).OurMarkov-switching dynamic regressionmodel indicates the existence of two distinct states, both for public debt and deficit, withmeans and standard deviations rather different. Both states are extremely persistent. Keywords: Public debt, Public deficit, Sustainability, Time series, Italy

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