Emilio Congregado, Carmen Díaz-Roldán y Vicente Esteve
We address a test for sustainability of the Italian government deficit over the period 1861-2020, using the fiscal theory of the price level (FTPL). This approach takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level,even if monetary authorities pursue an inflation targeting strategy. We use a cointegrated model with multiple structural changes
to characterize the sustainability of public finances and the prevalence of monetary versus fiscal dominance for sub-periods. We also use the recursive unit root tests for explosiveness to test fiscal sustainability
and to detect episodes of potential explosive behavior in Italian public debt.
Keywords: Fiscal Theory of the Price Level; Monetary and Fiscal dominance; Fiscal sustainability; Inflation; Public debt; Explosiveness; Cointegration; Multiple structural breaks