Public Debt Management & Fiscal Sustainability in Italy

Abstract

This paper examines the government finances for Italy to determine if they satisfy the Inter-temporal Budget Constraint (IBC) especially since post-Maastricht. Italy met the convergence criteria in order to be accepted as an EMU country. Arghyrou and Luintel (2005) examine the finances of Italy up to the pre-Maastricht convergence period and find that the finances of Italy showed weak form sustainability demonstrating a Maastricht effect. Standard assumptions have been that Italy’s true position of un-sustainability would be inherent post-Maastricht. This paper examines this issue and finds: (i) that the debt to GDP series shows that the finances of Italy are un-sustainable; (ii) however the government revenue and expenditure show weak form sustainability. This paper also finds a downward trend of the government debt to GDP ratio and a convergence of the government revenue and expenditure in recent times. This implies that the finances of Italy satisfy the IBC and indeed continue to maintain the result of weak sustainability even post-Maastricht.