Ricerc@Sapienza

Are Italy’s primary-surplus policies compatible with the sustainability of government debt? We address the question by examining
historical budget data in post-unification Italy, over the 150 years from 1862 to 2012. Controlling for temporary output, temporary
spending and world war-time periods in assessing whether primary surpluses significantly reacted to changes in debt, we find the
following results: (i) the hypothesis of nonlinearity in the surplus-debt relationship significantly outperforms the hypothesis of
linearity; (ii) there exists a threshold level in the debt-GDP ratio, approximately equal to 111%, above which Italian fiscal policy
makers are concerned with corrective actions to avoid insolvency; (iii) the robustly positive reaction of primary surpluses to debt
beyond the trigger point ensures fiscal sustainability.