Fiscal Dominance and Money Growth in Italy: The Long Record

Abstract

Fiscal dominance, that is, the extent to which government deficits condition the growth of the money supply, has been the prevailing regime in Italian monetary history from the creation of the state in 1861 to the 1980s. The nature of the institutional structure linking budget deficits to monetary base creation has changed over time. In the early days, the profit-seeking banks of issue exceeded intermittently the legal ceiling on their outstanding currency to lend to government. The influence of public finance on monetary policy became even stronger, first, in the 1930s and, later, in the 1970s. The joint event of an independent central bank and lower budget deficits are responsible for a reversal of fiscal dominance in the 1980s and the 1990s.

Keywords: budget deficits, fiscal dominance, monetary accommodation, central bank independence

JEL Classification: E51, E58, N13, N14