Embedded Macroeconomic Institutions: Italy’s Fiscal U-Turn in the 1990s and Beyond

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Series Details Vol.53, Issue 6, November 2015, p1301-1318
Publication Date November 2015
ISSN 0021-9886
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Abstract: Short-term theories on the determinants of fiscal consolidation underestimate that fiscal regimes are as entrenched as any other institution of a political economy. The case of Italy's fiscal adjustment in the run-up to EMU is used to show that external constraints and well-functioning institutions may well be just auxiliary.
The success factor in the country's macroeconomic stabilization was that competing socio-economic interests, while all in favour of disinflation, could eventually agree on the size and composition of the adjustment thanks to side-payments in the form of a devalued currency. These are unavailable under EMU, which explains why the fiscal reform momentum slowed down, notwithstanding EU fiscal rules. Domestic preference formation goes back a long way: it is associated with an incremental process of institutional change that started in 1981 with the enhanced independence of the Bank of Italy and continued with labour market and budget reform in the late 1980s.

Source Link http://dx.doi.org/10.1111/jcms.12253
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