The Effects of Fiscal Policy in Italy: Estimates with a Svar Model

Abstract:     
This paper studies the effects of fiscal policy on private GDP, inflation and interest rates in Italy using a structural Vector Autoregression. For this purpose a database of quarterly cash data for selected fiscal variables for the period 1982:1-2003:4 is constructed, largely on the basis of the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock raises private real GDP by 0.6 per cent after 3 quarters. The response of GDP goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on private consumption and investment are positive; the reaction of inflation is also positive but limited and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on GDP in the short-run; a negative and significant effect emerges after two years. The reactions of inflation and interest rates are positive and larger than in the case of a shock to purchases. Finally, shocks to net revenue have negligible effects on all the macroeconomic variables.

Number of Pages in PDF File: 42

Keywords: Fiscal policy, Government spending, Net revenues, Vector Autoregression

JEL Classification: E62, H30

working papers series