The Rise and Fall of Inflation in Italy in the 1990s: A Comparative Analysis of Four Different Explanations
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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Volume (Year): 57 (1998)
Issue (Month): 3-4 (December)
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