The 1963-1964 Crisis and the Modigliani-La Malfa Models

In a 1966 article, F. Modigliani and G. La Malfa criticized the monetary policy adopted by the Bank of Italy during the cyclical turning point of 1963-1964, and proposed an analytical outline interpreting the Governor’s ideas (‘model bi’), which they contrasted with a completely different macroeconomic model (‘model M-Lm’). This paper reconsiders the analytical structure and the interpretative capacity of the two models and their reception among Italian economists. It will make clear why debate focused more intensely on ‘model bi’ than on the model put forward by M-Lm, which was considered too distant from the real situation in Italy. Income distribution and interest rates were, rightly in the view of this writer, the core issues underlying the model’s unfavourable reception. Moreover, Italian economists were unable to comprehend the capacity already present in the M-Lm model to represent the dynamic consequences of the wage shock. The paper offers a reconsideration of Governor Carli’s conception of the development mechanism characterising the Italian economy and also of the stabilization policies that could be undertaken, starting from governance of money and its non-neutrality. It will also be suggested that neither the monetary policy transmission mechanism nor the marked constraints of the fixed exchange rate system on monetary policy were fully understood at the time.