At the Origins of the NAIRU: Supply Shock and Economic Policy in the 1960s Italian Experience

A critical stage of the macroeconomic events and Italian economic policy in the 1960s is outlined by examining two important contributions from the decade in question. In coordination with the works by Binotti and Ghiani and by Marinelli, in this issue, attention focuses on the role of Modigliani (particularly in Modigliani and La Malfa 1966) in highlighting the importance of supply conditions for determination of macroeconomic equilibrium, and on the economic policy implications of a clear conceptual distinction between sustainable equilibrium and full employment Walrasian equilibrium. The paper argues, firstly, that by applying the results of his 1963 model to the Italian case, Modigliani prompted a debate that foreshadowed many important themes linked to the notion of nairu. A second argument put forward here is that Modigliani definitively showed that the distributive outcome of a realwage shock cannot be influenced by monetary policy and depends only on the relative flexibility of prices and wages and the role of the exchange rate, thus demonstrating the ineffectiveness of the attempt to replace incomes policy by monetary policy. Finally, the work by Izzo, Pedone, Spaventa, Volpi, published in 1970, is discussed as an example indicating that definitive awareness of the macroeconomic role of supply and the related policies had by then been attained in Italy.