A Comparative Test of Alternative Theories of the Determinants of Italian Public Deficits (1950–1998)

The paper assesses the relative explanatorypower of the Keynesian, the optimalfinance, the contingent liability andseveral public choice theories of thedeterminants of public deficits on Italian1950–1998 data. A vector error correctionmodel suggests that deficits are sensitiveto unemployment levels, interest groups'preferences (especially the elderly),government fragmentation, changes in thedegree of stringency of budget rules andexternal economic constraints. Data insteadprovide a weak or no support to thehypotheses that deficits respond to outputgrowth and electoral events. Theimplications of the optimal finance and ofthe contingent liability theory arerejected as well.