Sustainability and determinants of Italian public deficits before and after Maastricht

The tormented Italian financial history, together with the international obligations that Italy endorsed by signing theMaastricht Treaty, calls for a verification of the sustainability of Italian public finances. This chapter thus first performs a Trehan and Walsh sustainability test (1988, 1991) of Italian public finances in the post–World War II period. These tests, however, can only indicate the presence, or the absence, of ‘‘forces’’ that eventually reestablish the long-run equilibrium in the fiscal choices of a country; they cannot identify what factors ultimately cause the dynamics and sustainability of the fiscal policies. Hence, this chapter then analyzes the determinants of the evolution of Italian public deficits.