Monetary Policy and Fiscal Dominance in Italy from the Early 1970s to the Adoption of the Euro: A Review

Abstract

This paper reviews the main literature and evidence on the relevance of fiscal dominance in Italy in the last part of the 20th century and examines the evolution of the techniques of Treasury financing and of monetary targets. In the early 1970s budget deficits and monetary base creation were correlated, but the paper argues that monetary accommodation mostly reflected the considerable weight that the monetary authority assigned to real objectives and to fine-tuning policies. The monetary regime changed in the early 1980s: public deficits continued to expand, but monetary base creation associated with the Treasury decreased, money targets were met, disinflation was successfully initiated. According to the paper, the review of the Italian experience indicates that monetary policy effectiveness in achieving price stability requires the adoption of clear objectives and the independence of the central bank, but it does not require the latter’s sphere of action to be limited to a specific set of operational tools. Furthermore, it signals that the independent management of monetary policy is not a sufficient incentive to foster fiscal responsibility.