Structural reforms and the potential effects on the Italian economy

Since the second half of 2011, after a period of prolonged low growth, Italy has found itself at the center of a severe economic crisis. Concerns about the sustainability of its debt burden, along with gloomy growth prospects, have pushed up the cost of government borrowing, exacerbating current eco...

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Bibliographic Details
Published in:Journal of policy modeling 2013-01, Vol.35 (1), p.88-109
Main Authors: Annicchiarico, Barbara, Di Dio, Fabio, Felici, Francesco
Format: Article
Language:English
Subjects:
Capital market
Consumption
Economic conditions
Economic crisis
Economic policy
Employment
Fiscal consolidation
Italy
Labor market
Labour market
Liquidity
Reforms
Simulation analysis
Structural reforms
Studies
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Summary:Since the second half of 2011, after a period of prolonged low growth, Italy has found itself at the center of a severe economic crisis. Concerns about the sustainability of its debt burden, along with gloomy growth prospects, have pushed up the cost of government borrowing, exacerbating current economic conditions. At the moment Italy is facing two mounting economic challenges: (i) achieve a rapid fiscal consolidation to restore financial market confidence; (ii) implement structural reforms to strengthen medium-term growth prospects. Using the European Commission's model QUEST III with R&D, adapted to Italy, we quantify the potential effects of a set of interventions inspired to the reform packages currently being undertaken or under discussion and consider different levels of policy effort. Results show that reforms are likely to bring about sizable gains in output, consumption, employment and net foreign assets position and that most of these gains derive from labor market reforms. However, the fiscal austerity plan is likely to severely mitigate the positive effects of the interventions, especially during the earlier phases of the reform process. Most of these losses accrue to liquidity-constraint households who would experience a drop in consumption.
ISSN:0161-8938
1873-8060
DOI:10.1016/j.jpolmod.2012.03.002