Deficit sustainability and the fiscal theory of the price level: the case of Italy, 1861-2020

Congregado, Emilio ^[1] ; Díaz-Roldán, Carmen ^[2] ; Esteve, Vicente ^[3]
1. [1] Universidad de Huelva
  
  Universidad de Huelva
  
  Huelva, España
2. [2] Universidad de Castilla-La Mancha
  
  Universidad de Castilla-La Mancha
  
  Ciudad Real, España
3. [3] Universidad de Alcalá
  
  Universidad de Alcalá
  
  Alcalá de Henares, España
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Localización: Documentos de Trabajo (IAES, Instituto Universitario de Análisis Económico y Social), ISSN-e 2172-7856, Nº. 3, 2023, págs. 1-47
Idioma: inglés
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Resumen
- We address a test for sustainability of the Italian government deficit over the period 1861-2020, using the fiscal theory of the price level (FTPL). This approach takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. We use a cointegrated model with multiple structural changes to characterize the sustainability of public finances and the prevalence of monetary versus fiscal dominance for sub-periods. We also use the recursive unit root tests for explosiveness to test fiscal sustainability and to detect episodes of potential explosive behavior in Italian public debt.