Non-Linear Budgetary Policies: Evidence from 150 Years of Italian Public Finance

Piergallini, Alessandro and Postigliola, Michele (2013): Non-Linear Budgetary Policies: Evidence from 150 Years of Italian Public Finance.

Abstract

We investigate the sustainability of Italy's public finances from 1862 to 2012 adopting a non-linear perspective. Specifically, we employ the smooth transition regression approach to explore the scope for non-linear fiscal adjustments of primary surpluses in response to the accumulation of debt. The empirical results show the occurrence of a significantly positive reaction of primary surpluses to debt when the debt-GDP ratio exceeded the trigger value of 110 percent. The after-threshold positive response implies that the path of Italy's fiscal policy is sufficiently consistent with the intertemporal budget constraint.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Policy; Fiscal Sustainability; Non-Linearity.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C20 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

Alesina, A. and Drazen, A. (1991), "Why Are Stabilizations Delayed?", American Economic Review 81, 1170-1188.

Arestis, P., Cipollini, A. and Fattouh, B. (2004), "Threshold Effects in the U.S. Budget Deficit", Economic Inquiry 42, 214-222.

Arghyrou, M. G. and Luintel, K. B. (2007), "Government Solvency: Revisiting Some EMU Countries", Journal of Macroeconomics 29, 387-410.

Arghyrou, M. G. and Fan, J. (2011), "UK Fiscal Policy Sustainability, 1955-2006", Cardiff Economics Working Papers E2011/9.

Bajo-Rubio, O., Diaz-Roldan, C. and Esteve, V. (2004), "Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case", Economics Letters 82, 239-243.

Bajo-Rubio, O., Diaz-Roldan, C. and Esteve, V. (2006), "Is the Budget Deficit Sustainable when Fiscal Policy is Non-linear? The Case of Spain", Journal of Macroeconomics 28, 596-608.

Barro, R. J. (1979) "On the Determination of Public Debt", Journal of Political Economy 87, 940-971.

Barro, R. J. (1986), "U.S. Deficits since World War I", Scandinavian Journal of Economics 88, 195-222.

Bates, D. M. and Watts, D. G. (1988), Nonlinear Regression Analysis & Its Applications, John Wiley, New York.

Bertola, G. and Drazen, A. (1993), "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity", American Economic Review 83, 11-26.

Bohn, H. (1995), "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit, and Banking 27, 257-271.

Bohn, H. (1998), "The Behavior of U.S. Public Debt and Deficits", Quarterly Journal of Economics 113, 949-963.

Bohn, H. (2008), "The Sustainability of Fiscal Policy in the United States", in Neck, R. and Sturm, J., Sustainability of Public Debt, MIT Press, Cambridge, 15-49.

Chortareas, G., Kapetanios, G. and Uctum, M. (2008), "Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries", Oxford Bulletin of Economics and Statistics 70, 645-663.

Cipollini, A., Fattouh, B. and Mouratidis, K. (2009), "Fiscal Readjustments in the United States: A Nonlinear Time-Series Analysis", Economic Inquiry 47, 34-54.

Considine, J. and Gallagher, L. A. (2008), "UK Debt Sustainability: Some Nonlinear Evidence and Theoretical Implications", Manchester School 76, 320-335.

Engle, R. F. (1982) "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation", Econometrica 50, 987-1007.

Fratianni, M., and Spinelli, F. (2001), Storia Monetaria d'Italia, ETAS, Milano.

Godfrey, L. G. (1988), Misspecification Tests in Econometrics, Cambridge University Press, Cambridge.

Hendry, D. (1995), Dynamic Econometrics, Oxford University Press, Oxford.

Legrenzi, G. and Milas, C. (2012a), "Long-Run Debt Sustainability and Threshold Adjustments: Non-Linear Empirical Evidence from the GIIPS", Economics Bulletin 32, 2586-2593.

Legrenzi, G. and Milas, C. (2012b), "Nonlinearities and the Sustainability of the Government's Intertemporal Budget Constraint", Economic Inquiry 50, 988-999.

Lundbergh, S., Teräsvirta, T. and van Dijk, D. (2003), "Time-Varying Smooth Transition Autoregressive Models", Journal of Business and Economic Statistics 21, 104-21.

Mendoza, E. G., and Ostry, J. D. (2008), "International Evidence on Fiscal Solvency: Is Fiscal Policy `Responsible'?", Journal of Monetary Economics 55, 1081-1093.

Piergallini, A. and Postigliola, M. (2012), "Fiscal Policy and Public Debt Dynamics in Italy, 1861-2009", Rivista Italiana degli Economisti 17, 417-440.

Ricciuti, R. (2008), "The Quest for a Fiscal Rule: Italy, 1861-1998", Cliometrica 2, 259-274.

Sarno, L. (2001), "The Behavior of US Public Debt: A Nonlinear Perspective", Economics Letters 74, 119-125.

Seber, G. A. F. and Wild, C. J. (1989), Nonlinear Regression, John Wiley, New York.

Teräsvirta, T. (1994), "Specification, Estimation and Evaluation of Smooth Transition Autoregressive Models", Journal of the American Statistical Association 89, 208--218.

Teräsvirta, T. (1998), "Modelling Economic Relationships with Smooth Transition Regressions", in Ullah, A. and Giles, D. E., Handbook of Applied Economic Statistics, Marcel Dekker, New York.

Teräsvirta, T. (2004), "Smooth Transition Regression Modeling", in Lutkepohl, H. and Kratzig, M, Applied Time Series Econometrics, Cambridge University Press, Cambridge.

Teräsvirta, T., Tjøstheim, D. and Granger, C. W. J. (2010), Modelling Nonlinear Economic Time Series, Oxford University Press, Oxford.