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An (Un)Pleasant Arithmetic of Fiscal Policy: the Case of Italian Public Debt

Marattin, Luigi and Marzo, Massimiliano (2008): An (Un)Pleasant Arithmetic of Fiscal Policy: the Case of Italian Public Debt.

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Using the simple arithmetic of government budget constraint, we perform an analysis on the Italian case, investigating the consequences on the main public finance aggregates of the adoption of a fiscal policy rule responding to past real debt/GDP ratio. Such a rule, firmly grounded in the economic analysis, would allow the reduction of Italy's outstanding stock of debt without requiring the strict adherence to the 3% criterion for deficit/GDP ratio, as prescribed by SGP. We perform a forecasting exercise under five alternative scenarios, analyze the details of a structural debt reduction strategy with alternative yearly step, and finally carry out a counterfactual exercise by applying our proposed rule to the period 1994-2006.

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