Crowding out in an inflationary open economy: The Italian case

In an inflationary open economy model we can predict that if the system is stable, money financed public deficits determine a long-run expansion in output while bond financed deficits show ambiguous long-term effects on output. With short-term bond financing, local stability is logically consistent with crowding out. Some empirical simulations on the Italian inflationary open economy indicate that a sustained increase in public consumption financed by short-run bonds induces a long-run convergent tendency to crowding out.