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The Rise and Fall of Inflation in Italy in the 1990s: A Comparative Analysis of Four Different Explanations

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Author Info

  • Eugenio Gaiotti

    ()
    (Bank of Italy, Research Department)

  • Andrea Gavosto

    (Fiat, Economic Unit)

  • Giuseppe Grande

    (Bank of Italy, Research Department)

Abstract

The paper considers four explanations of the recent turnaround in inflation in Italy: the Exchange rate channel that was the centerpiece of the monetary policy strategy in the preceding decade; domestic aggregate demand; inflation expectations and “fiscal dominance,” that have both been a central issue in the recent debate on monetary policy effectiveness. The weight of each story is assessed by way of a vector auto-regression. The results suggest that inflation expectations did matter as determinants of actual inflation; in contrast, changes in the default premium on the public debt are not found to have had a significant effect on inflation, thus rejecting the assumption of “fiscal dominance”. The two episodes of sharp exchange rate depreciation (in 1992 and 1995) were a major factor in pushing prices up; however, the expectational climate and demand shocks also appear to have played an important role.

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Bibliographic Info

Article provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.

Volume (Year): 57 (1998)
Issue (Month): 3-4 (December)
Pages: 297-324

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Handle: RePEc:gde:journl:gde_v57_n3-4_p297-324

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Related research

Keywords: monetary policy transmission; inflation expectations; vector auto-regression;

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Cited by:
  1. Eugenio Gaiotti & Alessandro Secchi, 2012. "Monetary policy and fiscal dominance in Italy from the early 1970s to the adoption of the euro: a review," Questioni di Economia e Finanza (Occasional Papers) 141, Bank of Italy, Economic Research and International Relations Area.
  2. Paolo Chiades & Leonardo Gambacorta, 2004. "The Bernanke and Blinder Model in an Open Economy: The Italian Case," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 1-34, 02.

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