Abstract
This paper employs an extended production function to examine the relationship between central government debt and economic growth in Italy. The results show that the threshold of the central government debt ratio for Italy is estimated to be 105.00%, which is greater than the 90% debt threshold proposed by Reinhart and Rogoff. Besides, a higher growth rate of labor employment or investment/GDP ratio would raise the growth rate. Hence, the debt threshold proposed by Reinhart-Rogoff underestimates the debt threshold for Italy. The finding suggests that the debt ratio of 131.09% in 2019 is well above the debt threshold and is likely to be unsustainable.
Highlights
During and after the global financial crisis, many countries engaged in fiscal expansion to stimulate their economies
The growth rate of real GDP is expressed as a percent
The growth rate of real GDP in Italy is positively affected by the growth rate of labor, the investment/GDP ratio, and the central government debt ratio and negatively affected by the central government debt ratio squared and the binary variable for years 2008 and 2009
Summary
During and after the global financial crisis, many countries engaged in fiscal expansion to stimulate their economies. Whether a higher government debt ratio would increase or reduce the growth rate of real GDP has been studied extensively. Reinhart and Rogoff (2010a, 2010b) show that the threshold or turning point of the government debt ratio is 90%.
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