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Monetary policy and fiscal dominance in Italy from the early 1970s to the adoption of the euro: a review

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  • Eugenio Gaiotti

    ()
    (Banca d'Italia)

  • Alessandro Secchi

    ()
    (Banca d'Italia)

Abstract

This paper reviews the main literature and evidence on the relevance of fiscal dominance in Italy in the last part of the 20th century and examines the evolution of the techniques of Treasury financing and of monetary targets. In the early 1970s budget deficits and monetary base creation were correlated, but the paper argues that monetary accommodation mostly reflected the considerable weight that the monetary authority assigned to real objectives and to fine-tuning policies. The monetary regime changed in the early 1980s: public deficits continued to expand, but monetary base creation associated with the Treasury decreased, money targets were met, disinflation was successfully initiated. According to the paper, the review of the Italian experience indicates that monetary policy effectiveness in achieving price stability requires the adoption of clear objectives and the independence of the central bank, but it does not require the latter’s sphere of action to be limited to a specific set of operational tools. Furthermore, it signals that the independent management of monetary policy is not a sufficient incentive to foster fiscal responsibility.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 141.

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Date of creation: Nov 2012
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Handle: RePEc:bdi:opques:qef_141_12

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Web page: http://www.bancaditalia.it
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Keywords: Bank of Italy; monetary policy; fiscal dominance;

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  1. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  2. Eugenio Gaiotti & Andrea Gavosto & Giuseppe Grande, 1998. "The Rise and Fall of Inflation in Italy in the 1990s: A Comparative Analysis of Four Different Explanations," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 57(3-4), pages 297-324, December.
  3. Carlo Cottarelli, 1993. "Limiting Central Bank Credit to the Government," IMF Occasional Papers 110, International Monetary Fund.
  4. Donato Masciandaro & Guido Tabellini, 1987. "Monetary regimes and fiscal deficits: a comparative analysis," Proceedings, Federal Reserve Bank of San Francisco, pages 125-152.
  5. Gressani, Daniela & Guiso, Luigi & Visco, Ignazio, 1988. "Disinflation in Italy: An analysis with the econometric model of the bank of Italy," Journal of Policy Modeling, Elsevier, vol. 10(2), pages 163-203.
  6. Alberto F. Alesina & Andrea Stella, 2010. "The Politics of Monetary Policy," NBER Working Papers 15856, National Bureau of Economic Research, Inc.
  7. Giuseppe Tullio & Marcio Ronci, 1997. "Central Bank Autonomy, the Exchange Rate Constraint and Inflation: The Case of Italy, 1970–1992," Open Economies Review, Springer, vol. 8(1), pages 31-49, January.
  8. Tabellini, Guido, 1987. "Central Bank Reputation and the Monetization of Deficits: The 1981 Italian Monetary Reform," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 185-200, April.
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