Sandro Momigliano

The Effects of Fiscal Policy in Italy: Evidence from a VAR Model

This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on 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 increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables.

A Disaggregated Framework for the Analysis of Structural Developments in Public Finances

In this paper, we present a disaggregated framework for the analysis of past and projected structural developments in the most relevant revenue and expenditure categories and the fiscal balance. The framework, in particular, distinguishes between the effects of discretionary fiscal policy and of macroeconomic and other developments and is sufficiently standardised to be used in multi-country studies. Here, it is applied to Belgium, Finland, Germany, Italy, the Netherlands and Portugal over the period 1998 to 2004. During this period the structural primary balance ratio clearly worsened in all countries except Finland. In Belgium, Italy and the Netherlands, both revenue and expenditure contributed to the deterioration of the structural primary balance. In Germany the large deterioration in revenue was partially offset by the decline in the structural primary expenditure ratio, while the opposite was true for Portugal. The analysis highlights the various factors that contributed to these developments.

The Cyclical Response of Fiscal Policies in the Euro Area – Why Do Results of Empirical Research Differ so Strongly?

Whether discretionary fiscal policies in industrialized countries act counter- or pro-cyclically and whether their reaction is symmetric or asymmetric over the cycle are still largely unsettled questions. This uncertainty remains even when attention is restricted to euro-area countries, where these questions have important implications for the debate on European fiscal rules. We review the recent empirical literature to explain why the results of the various studies differ so greatly. We find that differences are driven partly by the choices made in modelling fiscal behaviour and in the related notions of fiscal policy cyclicality. Results are also affected by data source and vintage (ex post or real-time). The time period chosen is relatively less important. We conclude that the notion of pro-cyclical fiscal policies often upheld in the debate is not justified by the data. Ex post data suggest either a-cyclicality or weak counter-cyclicality. Real-time information gives clearer indications of counter-cyclical behaviour, especially when we progress from a very simple i?½corei?½ model to a more complex one, including at least the impact of fiscal rules. As for symmetry or asymmetry, the answer varies with sources of data and time periods. With the more complex model the indications of asymmetric behaviour are more robust. Whenever asymmetry is present, it entails shifts in all the parameters of the fiscal rule and not necessarily in the output gap parameter.

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

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.

Real-Time Determinants of Fiscal Policies in the Euro Area: Fiscal Rules, Cyclical Conditions and Elections

We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.

The Reaction of Fiscal Policy to the Crisis in Italy and Germany: Are they really polar Cases in the European Context?

The deep recession which hit the world economy towards the end of 2008 induced massive, internationally-coordinated policy responses, both monetary and fiscal. In this paper we examine public finance developments in Germany and Italy in 2009. We find that the larger stimulus measures adopted in Germany mostly compensated a more favorable underlying trend; overall, the cyclically-adjusted primary balances worsened by a similar extent in the two countries. We further estimate the automatic stabilisers to have had an impact on the deficit of similar magnitude in Germany and Italy. We then assess, on the basis of counterfactual simulations, to which extent discretionary measures and automatic stabilizers were able to mitigate the downturn in the two countries. Our results show that the public sector contrasted the fall in real GDP in 2009 by more than 2 percentage points in Germany and by 1 per cent in Italy. The difference in the stabilizing effect of the two public sectors reflects not only the different size of the stimulus measures, but also the higher fiscal multipliers associated with Germany.

Dealing with Unexpected Shocks to the Budget

We assess the impact of unexpected shocks to real interest rates and GDP growth on government budgets for nine European Union countries. Shocks are estimated as onestep-ahead forecast errors arising from a recursive bivariate VAR model. Our analysis is relevant, in particular, to deciding what safety margins are needed to limit the risk of the deficits exceeding the 3% Maastricht threshold. The approach followed differs in two respects from standard analyses aiming at defining budgetary positions that satisfy the Stability and Growth Pact. First, whereas the latter examine only fluctuations in economic activity, we also consider fluctuations in interest rates. Second, whereas standard analyses focus on deviations from trends and define margins for the mediumterm cyclically adjusted balance, we examine unexpected shocks and define margins for nominal balances. The results point to significant differences in the required margins across countries.

Appraising the Effects of the Budget on the Economy with an Econometric Model: The Italian Fiscal Adjustment in the Nineties

This paper describes a procedure for assessing the effects of the budget on economic activity in the short term. Based on counterfactual simulations of an econometric model, the procedure takes into account more relationships between the budget and the economy than other, more synthetic indicators. It not only measures the impact of the budget on output but also evaluates how the budget affects prices and other macroeconomic variables. Moreover, the procedure provides estimates of the effects of specific features of the budget, such as its composition. The procedure is used to appraise the impact of the budget on the Italian economy in the period 1991-2000, using the Bank of Italy’s Quarterly Econometric Model. During the period of fiscal consolidation (1991-97), the impact on GDP growth was generally negative, averaging about -0.6 percentage points (with a spike of -1.4 points in 1995). As fiscal policy relaxed once Italy had succeeded in joining the Monetary Union, the impact on output growth became slightly positive, as in 1998 and 1999, or neutral, as in 2000. Even within the generally restrictive context, the budget exerted a mildly counter-cyclical influence. This result is in line with the findings of previous literature for the 1970s and 1980s. The composition of the budget often played a significant role, in some years amplifying the impact on the primary deficit, in others reducing or even offsetting it. In the period 1991-97, changes in the composition substantially increased the costs of fiscal adjustment. The average impact of the budget on inflation was basically nil in the decade. The results appear significantly different, both quantitatively and qualitatively, from those obtained using the synthetic budget indicators commonly used to assess the fiscal stance. Lastly, a number of additional experiments assess the sensitivity to changes in some key assumptions. In particular, a forward-looking specification of consumers’ behaviour and a forward-looking Taylor-type monetary policy reaction function were estimated and used in the counterfactual simulations. Neither results in significant modifications in the paper’s main conclusions.