Non-linear budgetary policies: Evidence from 150 years of Italian public finance

We investigate the sustainability of Italy's public finances from 1862 to 2012 adopting a non-linear perspective. Specifically, we employ the smooth transition regression approach to explore the scope for non-linear fiscal adjustments of primary surpluses in response to the accumulation of debt. The empirical results show the occurrence of a significantly positive reaction of primary surpluses to debt when the debt-GDP ratio exceeded the trigger value of 110 percent. The after-threshold positive response implies that the path of Italy's fiscal policy is sufficiently consistent with the intertemporal budget constraint.