Can civilian disability pensions overcome the poverty issue? A DSGE analysis for Italian data

Abstract

In Italy, poverty and disability are two strictly related issues. Households with disabled members continuously face a poverty risk. We simulate a simple Real Business Cycle model to investigate the macroeconomic effects of a permanent increase of civilian disability pensions. We stress the effectiveness of such a policy to stimulate private consumptions. The exercise is implemented via the reduction—both temporary and permanent—of public spending. Results show both the long- and short-run trade-off the policy maker has to deal with when the disability-poverty dualism becomes a relevant issue. In the long-run, a minimum increase of civilian disability pensions allows households with a disabled member to consume more and to exit from poverty condition. However, while temporary decline of public consumption entails a larger decrease of income inequality between the two groups of households, permanent reduction dampens the unavoidable recessionary effect. In the short-run, a temporary reduction of public spending causes an immediate surge of the consumption of households with a disabled member at a cost of a deep recession. By the opposite, a permanent public spending reduction softens the unavoidable output slump but private consumptions only gradually increase.