Public Debt and Economic Growth in Italy

Fabrizio Balassone, Maura Francese and Angelo Pace ()
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Angelo Pace: Banca d’Italia, Structural Economic Analysis Department

No 11, Quaderni di storia economica (Economic History Working Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we investigate the link between government debt-to-GDP ratio and real per capita income growth in Italy over 1861-2009. We model our regression analysis on a standard production function. Our results support the hypotheses of a negative relation between public debt and growth and of a stronger effect of foreign debt compared to domestic debt before World War I. The effect of public debt on growth appears to work mainly through reduced investment. These results help explain the different reaction of per capita GDP growth to the debt-ratio over 1880-1914 (when the negative correlation between the two variables is particularly strong) and 1985-2007 (when the correlation appears to break down when debt starts declining). A descriptive analysis of fiscal policy in these two periods suggests that differences in the timing of fiscal consolidation as well as in the size and composition of the budget are additional explanatory factors.

Keywords: public debt; economic growth; Italian economic history (search for similar items in EconPapers)
JEL-codes: E60 H63 N0 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-fdg, nep-his and nep-pub
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Citations: View citations in EconPapers (37)

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