Sustainability of Italian budgetary policies: A time series analysis (1861-2008)

This paper relates to Professor Francesco Forte’s path breaking work, professional guidance, and contributions to the understanding of issues dealing with the sustainability of Italian Fiscal Policy and Public Debt.  The paper examines the Professor Forte’s work using Time Series analysis for the Period 1861-2008. This paper analyzes the sustainability of Italy’s public finances using a unique database, reconstructed from multiple sources covering the period 1862-2008. This paper focuses on empirical tests for the sustainability and solvency of fiscal policies. The rise of public indebtedness of many industrial countries during the last decades of the Nineteenth century has caused increasing concern about its potentially unfavorable effects. 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. The results of unit root and stationarity tests show that the variables are non-stationary at relevant 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 (1862‐1946 and 1947‐2008). Moreover, anecdotal evidence and visual inspection of the series confirm our results. Furthermore, we conduct tests on co-integration, including the estimation of Vector Auto-regression (VAR) and Vector Error Correction Models (VECM).  Cointegration results 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 has sustainability problems in the Republican age.