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Discusses the macroeconomics of Italy and its recent fiscal and monetary policies.... More...
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Macroeconomic Policy in Italy According to Italy Review since the end of World War II theItalian economy has been transformed from an agrarian to an industrial baseand now ranks as the seventh largest economy in the world with an economicstructure comparable to that of other advanced Organization for Economicand Cooperative Development OECD countries However Business MonitorInternational states that the Italian economy will ease in dueto record energy prices a strong Euro and the potential fallout from anautumn global credit squeeze Also the
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Bibbee (2 7) described Italy's economic system as based onfederalism and said that structural reforms and budget consolidationcoupled with the empowerment of subnational governments regarding the usesof tax money have the potential to improve the allocation of publicresources while promoting the advancement of lagging regions in thecountry. Accessed online, June 13, 2 8. (2 8). Indeed, one of the major accomplishments of Italy'sgovernment has been walking a tightrope between alternating periods ofgovernment spending and retrenchment. A new and ongoing clampdown on tax evasion coupled with increasedtaxes may have the long-term effect of enhancing revenues and offsettingthe legendary Italian penchant for savings as opposed to consumption. Also, the downturn in economic activityis likely to be a longer term winding down of the growth cycle towardhistorical trends due to domestic fiscal and monetary policies. However, as reported by The Economist (2 8), the combination offiscal and monetary policies implemented thus far have not begun to accountfor the untaxed or black economy which makes up one-sixth of gross domesticproduct. (2 7). Monetary authorities in Italy continue to adopt a short-term rate as their policy instrument of choice. (2 7/2 8). This has had the effect of leading the government to intervene bypurchasing more goods and services which has had a sizable and robusteffect on national economic activity (Giordano, Momigliano, Neri, &Perotti, 2 8). Increases in age related spendingare likely in the future even though pension reform is planned. (2 8). (2 6). Accessed online, June 13, 2 8.Economic overview. Bibbee (2 7)argues that redistributive mechanisms should be redesigned to improvefiscal effort. (2 7). Available at www.economist.com/Countries/Italy. Available at www.oecd.org/Working_Papers. Italy's budget targets boosting fiscal order. This means that the government must determine to whatextent it can afford to guarantee uniform national service levels and howmuch regional differentiation of services it will tolerate while it pursueshigher efficiency. Available at http://ideas.repac.org. (2 6). Limitedinflation and greater independence of the Bank of Italy have allowed thiscentral bank (which participates in the European Exchange Rate Mechanism)to keep Italy's currency within a narrow band. Apromising improvement in the underlying fiscal situation in 2 6 and mostof 2 7 has been slowed in the revised 2 7 budget and 2 8 budget (Italy:Watch that deficit, 2 7-2 8). Fiscal policy and price stability: The case of Italy, 1992-1998. Available at www.economist.com/world/Europe. (2 7). However, the country's economic growthremains at the bottom of the Euro zone. The Wall Street Journal, 25 (77), A46.Quagliariello, M. Economist.com. Italy Defense & Security Report Q2, 42-45.Country Profile. A majorstep forward for Italy, which has experienced 59 governments since WorldWar II is a strong push to stabilize government spending and to tacklecorruption and the patronage system (Country profile, 2 8). ReferencesBassetto, M. Accessed online, June 13, 2 8.Business Monitor International. The effects of fiscal policy in Italy: Evidence from a VAR model. Macroeconomic Policy in Italy According to Italy Review (2 7), since the end of World War II, theItalian economy has been transformed from an agrarian to an industrial baseand now ranks as the seventh largest economy in the world with an economicstructure comparable to that of other advanced Organization for Economicand Cooperative Development (OECD) countries. Italy Review, 83-85.Giordano, R., Mornigliano, S., Neri, S., & Perotti, R. An upward revision in spending should becarefully checked because it is not the best response to unanticipated andlargely temporary buoyancy in revenues. This is troubling in light of thecountry's aging population and the probability that increased spending onpensions and other social welfare programs is likely to increase ratherthan decrease over time. Quagliariello (2 6) believes that Italian banks have not always madethe best choices between loans and risk-free assets due to ongoingincreases in the uncertainty of macroeconomic conditions. Making federalism work in Italy. Fiscal policy mechanisms to achieve price stability have been andshould continue to be implemented in Italy (Bassetto, 2 6). & DiLeo, L. OECD Observer, 264/265, 44.Kahn, G. Monetary and fiscal policies in Italy reflect federalism. European Journal of Political Economy, 23(3), 7 7-733.Italy: Watch that deficit. (2 8). Macroeconomic forecast. Fiscalpolicies are being decentralized via spending with improvements inregulatory and tax powers at the subnational and national levels.Constitutional reform in 2 1, though not fully implemented, shouldultimately lead to a stronger focus on the financing side or getting abetter match between spending responsibilities and taxing powers to boostlocal autonomy and responsibility (Bibbee, 2 7). Chicago Fed Letter, 233, 1-4.Bibbee, A. At the present time, the Italian budget deficit is troubling. Bassetto (2 6) argues thatItaly's monetary policy was changed in the late 199 s to empower theCentral Bank to behave more autonomously regarding the determination ofinterest rates. The question of whether current fiscal and monetary policies in Italyare adequate to the task at hand is difficult to answer. (2 7). However, Business MonitorInternational (2 8) states that the Italian economy will ease in 2 8 dueto record energy prices, a strong Euro, and the potential fallout from anautumn 2 7 global credit squeeze. Accessed online, June 13, 2 8.Tax bonanza. 2) said "framework conditions need tobe strengthened, notably accounting standards which need to be upgraded andunified. Bibbee (2 7, p. The Economist. Macroeconomic uncertainty and banks' lending decisions: The case of Italy. Kahn and DiLeo (2 7) claim that a modest of tax cuts delivered in2 7 to businesses by Prime Minister Romano Prodi's government indicatedpositive macroeconomic reforms. Over time, theItalian banks have responded to shocks in the economy by retrenching fromloans. Fiscal discipline under the Internal Stability Pact should bestrengthened via better ex ante coordination and tougher sanctions expost." The Italian government faces difficult choices as it works tostrengthen its tax base, reduce spending, control budget deficits, andallow the Bank of Italy to continue overseeing monetary policies unhamperedby political involvement.
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