A wavelet analysis of Italian fiscal sustainability

Abstract

The aim of this paper is to reassess the relationship between public primary deficit and debt (as GDP ratios), in order to test for Italian fiscal sustainability over the period 1862-2013. Italy has the second largest public debt/GDP ratio, and it represents the third economy in the European Union (EU), so that its public accounts stability is crucial for the whole area (Brady and Magazzino 2017a).The main problem for Italy, however, besides its high existing debt on which it is paying high interest in absolute terms, is that its growth is too slow. Since the euro area was founded, Italy's average annual real growth was 0.4%, just marginally above the lowest rate of 0.3% per annum for Greece and one percentage point below the mean value for the overall euro area. Italy's low growth rate, in turn, can be attributed to several structural causes. The country has recorded near zero productivity growth for years, and businesses are often very small, focus on the domestic market, and invest too little in R&D. Major inefficiencies exist in administration, e.g. in the justice system, and capital intensity is too low, also because investment declined by as much as 30% after the financial crisis. This was recently exacerbated by problems in the banking sector, including as a result of poor investment decisions in the past and short survival rates of governments over a long period, which have led to frequent election campaigns and delays in economic policy.Time domain analysis is the most widespread approach in the economic literature to study time series. Through such approach, the evolution of individual variables is modelled and multivariate relationships are assessed over time. Another strand of literature focuses on the frequency domain. Wavelets analysis reconciles both approaches, in the sense that both time and frequency domains are taken into account. With this approach, AbstractIn this paper, we analyse the relationship between public primary deficit and debt for Italian sustainability over the 1862-2013 years. Our empirical strategy uses the wavelet analysis. The empirical evidence suggests the presence of a substantial fiscal sustainability in the long run for Italy. This reversed much of the results of previous empirical literature, due to traditional time series approach and a shorter time horizon. which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Fiscal sustainability in highly indebted countries: evidence from Jamaica

“…For Italy, Magazzino and Mutascu (2019) find that: public debt is non-stationary; primary deficit stationary at levels; non-stationarity of the public debt; and that public debt and deficit do not share many common features. …”

Wavelets for Long Waves: Was Kondratieff’s Intuition Right?

“…The approximations generated by the procedure are robust to small variations (Gallegati et al, 2017). WA provides an efficient way to deal with variables lasting for a finite time, or showing markedly different behavior in their time-sequence (Crowley, 2007), hence its adoption can be appropriated to analyze time series containing non stationary power at many different frequencies (Magazzino andMutascu, 2019 andDaubechies, 1990). Due to such a flexibility, many disciplines (among the others astronomy, climatology, engineering, medicine)…”

Debt sustainability and the fiscal reaction function: evidence from MIST countries

“…The obvious question is whether the current macroeconomic policies in MIST countries can avert financial crises which question the essence of revisiting its level of public debt accumulation. This further questions the importance of macroeconomic policy and the effectiveness of debt management in reducing fluctuation that is expected should in case the financial obligation cannot be met [33,50]. In addition, the present inconsistency observed in the external asset and liability of the MIST countries shows the possibility that setbacks in growth are expected.…”