Abstract

Monetary Policy in Italy from 1970 to 1978

Some conclusions may now be drawn about the role of monetary policy in Italy. Throughout the whole period since the end of the Second World War, monetary policy has played a decisive role in the control of Italy’s economic cycle and external accounts. The country’s inflation and balanceof- payments crisis have been preceded - both during the 70’s, which is the period considered here in greater detail, and earlier - by rises in the ratio of public and private sector financing to GDP. Monetary restriction has always been quite effective in controlling such crises. There has been clear evidence since 1973 of a mechanism whereby an increase in firms’ liquidity leads to the exportation of foreign exchange, speculative stockbuilding, depreciation of the lira and inflation. The control of monetary policy on the level of prices passes through the external value of the currency. The possibility of manoeuvering credit aggregates has been progressively reduced by the increase in the share of total credit absorbed by the public sector. Such a share was just below 30 %/oe in the 50’s, went down to less than 15% in the period 1959-63, to rise again to 30 in the period 1964--69. In the 70’s, up to 1976, the share of total credit going to the public sector rose on the average to 40%; in 1977 and 1978 it was respectively around 60 and 65 %. (It is to be remarked however that a growing proportion of the financing to the public sector goes finally to cover financial needs of the private productive sector, and a growing proportion is transferred to agents with a high propensity to save.) The 1947 stabilization laid the foundation for rapid and long-lasting economic growth in Italy, while that of 1963 made possible a return to growth in output and investment with stable prices, though not in employment. Since 1969 monetary policy has continued to correct the country’s external disequilibria but especially in connexion with the changed conditions of the labour market, the rate of inflation has remained high, and the recovery in production has been slow. In particular the oil crisis required recourse to monetary policy in order to curb domestic demand and check the imbalance in the external accounts. In view of the trend of costs and the increasing weight of the public sector deficit, the slowdown has mainly affected the level of investment, and only in part the rate of inflation. Thanks to its present strong external situation accounts, Italy finds itself at the end of 1978 in a position to return to a policy of markedly faster growth than in the last few years, with a surplus on the balance of payments which is enabling the burden of foreign debt accumulated since 1973 to be steadily reduced. Monetary policy and, in particular, the control of total financing of liquidity (especially that of firms), and of the structure of interest rates continue to be essential in order to keep overall demand within the limits of potential supply and maintain the improved balance-of-payments situation. If the economy is to be able to achieve the growth rate which the availability of savings and labour would allow, it is nonetheless necessary that over the next few years a number of conditions - to a large extent outside the control of monetary policy - should be satisfied. These conditions can be summarized as: a) adequate growth in world demand; b) a reversal of the present tendency for the share of employee incomes to increase as a proportion of national income. This is necessary in order to keep exports sufficiently competitive and to make room for an increase in investment. To curb inflation, there will have to be a slowdown in the rate of increase of wage earnings in nominal as well as real terms; c) a reduction in the share of private savings used to cover the general government deficit on current account - again so as to provide greater scope for investment; d) a recovery in both public and private investment demand.