COVID-19, Economic Policies and Public Debt Sustainability in Italy

Abstract

We analyze the conditions for public debt-to-GDP ratio stability extending the Domar’s approach by including the interaction between the government’s reaction function and the private sector’s reaction function, and considering the impact of 2020–2021 pandemic shock and the monetary and fiscal policy responses, with simulations applied to the Italian case. The outcomes of the numerical simulations show the crucial importance of ECB extraordinary monetary policies, of the NGEU and, to lesser extent, of national expansionary fiscal policies adopted during pandemic shock; both European wide monetary and fiscal policies actually increase the sustainability area avoiding the high risk of sovereign debt crisis in Italy (and other peripheral Eurozone countries). The stabilizing effect of GDP growth, hopefully resulting from the NGEU policy, is also simulated in the paper.