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Deficit sustainability and the Fiscal Theory of the Price Level: the case of Italy, 1861-2020

Author

Listed:
  • Emilio Congregado

    (Universidad de Huelva, Spain)

  • Silviano Carmen Díaz-Roldán

    (Universidad de Castilla-La Mancha, Spain)

  • Vicente Esteve

    (Universidad de Valencia and Universidad de Alcalá, Spain)

Abstract

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.

Suggested Citation

  • Emilio Congregado & Silviano Carmen Díaz-Roldán & Vicente Esteve, 2023. "Deficit sustainability and the Fiscal Theory of the Price Level: the case of Italy, 1861-2020," Working Papers 2301, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:2301
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    More about this item

    Keywords

    Fiscal Theory of the Price Level; Monetary and ?fiscal dominance; Fiscal sustainability; In?ation; Public debt; Explosiveness; Cointegration; Multiple structural breaks;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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