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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpolmod.2006.04.003 Byline: Barbara Annicchiarico Keywords: Price stability; Fiscal policy; Government debt; Stability and Growth Pact (SGP) Abstract: In the context of the current policy debate on the reform of European fiscal rules, there is wide consensus on the need to place more attention on debt-GDP ratios. Proposals have been made to alleviate fiscal pressure on Member States with relatively low public debts. The present paper gives support to this view. Economies with high public debt-GDP ratios are shown to experience larger price deviations after a fiscal expansion. These results are derived in a model, calibrated to euro area quarterly data, with capital accumulation, flexible prices and wealth effects in the presence of an independent monetary authority. Author Affiliation: Department of Economics, University of Rome 'Tor Vergata', Via Columbia 2, 00133 Roma, Italy Article History: Received 13 October 2005; Revised 8 March 2006; Accepted 22 April 2006 Article Note: (footnote) [star] A previous version has been published as ECB Working Paper no. 285. A detailed Technical Appendix is available from the author upon request.

Abstract: 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. [Copyright &y& Elsevier]