Public Expenditure and Revenue in Italy, 1862-1993

This study examines the long-run equilibrium relationship between government expenditure and revenue in Italy from 1862 to 1993, using cointegration and causality techniques in the long as well as in the short-run, through integrating the Error Correction Model (ECM) into the traditional Granger causality test. A Granger non-causality test (due to Toda and Yamamoto) is also performed. Unit root tests have been applied in order to investigate the stationarity properties of the series. Moreover, three more homogeneous sub-period (1862-1913; 1914-1946; 1947-1993) have been analyzed. The nexus between public expenditure and revenue has been discussed also by Forecast Error Variance Decompositions (FEVDs). Empirical findings show that, for each sub-period, the policy adopted reflects the prevailing paradigm of public finance. In fact, the “Tax-and-Spend” argument, received empirical support from the liberal period data. In contrast, the interwar years are in line with the “Spend-and-Tax” hypothesis. Finally, the “Fiscal Synchronization” hypothesis emerges in the republican ages.