Can civilian disability pensions overcome the poverty issue? A DSGE analysis for Italian data

In Italy, poverty and disability are two strictly related issues (Parodi, 2004, 2006, 2007; Parodi and Sciulli, 2008; Davila Quintana and Malo, 2012). Moreover, public transfers are not sufficient to exlude households with at least one disabled member from the poverty risk. We simulate a simple Real Business Cycle model to investigate the macroeconomic effects of a permanent increase in civilian disability pensions. In particular, we stress whether such a policy action is effective to stimulate private consumption. The exercise is implemented through both temporary and permanent reduction of public spending. Results show that in the long run a minimum increase in civilian disability pensions allows households with one disabled member to consume more and, importantly, to exit from poverty condition. In the short run we observe a policy trade-off. If public spending reduction is temporary and fast, private consumptions immediately increase but output deeply falls. On the contrary, if public spending permanently and slowly reduces, the recessionary effect softens but private consumptions only gradually increase.