Growth vs. Discipline: Italy's Fiscal Dilemmas in a Stock-Flow Consistent Model

Francesco Zezza and Gennaro Zezza

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper investigates the implications of the European Union's revised fiscal governance framework for Italy, a country facing the dual challenge of high public debt and persistent economic stagnation. Using a Stock-Flow Consistent (SFC) macroeconometric model of the Italian economy (MITA), we assess the medium-term macroeconomic implications of the government Medium-term Fiscal-Structural Plan, and whether it aligns with debt stabilization and economic recovery goals. We show how the government expenditure path, consistent with the new Debt Sustainability Analysis, leads instead to an increase in debt/GDP. We perform alternative fiscal policy scenarios (higher/lower spending; higher/lower direct tax rate; and a policy mix of higher spending and higher tax rate) and look at the effects on growth and debt sustainability. Results highlight the trade-offs inherent in adhering to the revised fiscal rules, particularly the tension between achieving long-term debt reduction and supporting growth.

Keywords: European Fiscal Rules; Debt Sustainability; Empirical Stock-Flow Consistent Models; Italy; Fiscal Policy (search for similar items in EconPapers)
JEL-codes: C54 E12 E17 E44 E62 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pke
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