Public Debt and Economic Growth in Italy

35 Pages Posted: 23 Mar 2013  

Fabrizio Balassone

Bank of Italy

Maura Francese

Bank of Italy

Angelo Pace

Bank of Italy

Date Written: October 25, 2011

Abstract

In this paper we investigate the link between government debt-to-GDP ratio and real per capita income growth in Italy over 1861-2009. We model our regression analysis on a standard production function. Our results support the hypotheses of a negative relation between public debt and growth and of a stronger effect of foreign debt compared to domestic debt before World War I. The effect of public debt on growth appears to work mainly through reduced investment. These results help explain the different reaction of per capita GDP growth to the debt-ratio over 1880-1914 (when the negative correlation between the two variables is particularly strong) and 1985-2007 (when the correlation appears to break down when debt starts declining). A descriptive analysis of fiscal policy in these two periods suggests that differences in the timing of fiscal consolidation as well as in the size and composition of the budget are additional explanatory factors.

Keywords: public debt, economic growth, Italian economic history

JEL Classification: H63, E60, N0

Suggested Citation

Balassone, Fabrizio and Francese, Maura and Pace, Angelo, Public Debt and Economic Growth in Italy (October 25, 2011). Bank of Italy Economic History Working Paper No. 11. Available at SSRN: https://ssrn.com/abstract=2236725 or http://dx.doi.org/10.2139/ssrn.2236725

Fabrizio Balassone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Maura Francese

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Angelo Pace

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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