Financial innovation and monetary control in Italy

Abstract

Increasingly the pressures of deregulation and competition have promoted innovation in the development of financial instruments. In the case of Italy the pressure for innovation has arisen from the need to finance the public sector borrowing requirement and the effects of inflation. As a result, funding instruments have been switched from longer-term bonds to the shorter-term treasury bill. However, this can lead to excessive supply of liquid assets with consequent problems for monetary controls. Such factors will make it more difficult to use monetary aggregates as a guide to monetary policy in the future.