Latent fiscal dominance: monetary accommodation and the Bank of Italy–Treasury divorce, 1962–1998

Italian monetary policy remained subordinated to public financing between the 1960s and the euro, deficits being routinely accommodated through monetary base creation. This paper asks whether that configuration amounted to a non-Ricardian regime in the sense of the Fiscal Theory of the Price Level. Bivariate VARs, a structural-cyclical decomposition of the primary balance addressing the observational equivalence critique, and a three-variable variance decomposition all yield Ricardian-like dynamics. Yet the structural primary balance behaved as a near-autonomous process, satisfying the definition of active fiscal policy. I characterise this as a hybrid regime, latent fiscal dominance within a Ricardian outcome, sustained by the central bank’s dual role as fiscal accommodator and market coordinator. The 1981 divorce dismantled that architecture progressively rather than triggering a regime switch: fiscal contributions to monetary base variance fell from 93 to at most 48 per cent, a transition the Annual Reports show was completed only under Maastricht.