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

Emilio Congregado, Carmen Díaz-Roldán and Vicente Esteve
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Carmen Díaz-Roldán: Universidad de Castilla-La Mancha, Spain
Vicente Esteve: Universidad de Valencia and Universidad de Alcalá, Spain

No 2301, Working Papers from Department of Applied Economics II, Universidad de Valencia

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.

Keywords: Fiscal Theory of the Price Level; Monetary and ?fiscal dominance; Fiscal sustainability; In?ation; Public debt; Explosiveness; Cointegration; Multiple structural breaks (search for similar items in EconPapers)
JEL-codes: E62 H62 O52 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Journal Article: Deficit sustainability and fiscal theory of price level: the case of Italy, 1861–2020 (2023)
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