The Sustainability of Italian Public Debt and Deficit

In this paper, we analyse the sustainability of Italian public debt using a unique database, reconstructed by Forte (2011), which covers the years 1862–2013. The study focuses on empirical tests for the sustainability and solvency of Italian public finance. The results of unit root and stationarity tests show that public debt and deficit variables are non-stationary at levels, but stationary in first-differences form, or I(1). However, some breaks in the series emerge, given internal and external crises (wars, oil shocks, regime changes, institutional reforms). Therefore, the empirical analysis is conducted for the entire period, as well as two sub-periods (1862–1913 and 1947–2013). In essence, the paper’s results reveal that Italy has sustainability problems in the Republican age (1947-2013). Our Markov-switching dynamic regression model indicates the existence of two distinct states, both for public debt and deficit, with means and standard deviations rather different. Both states are extremely persistent