Public Deficit and Monetary Course Change in Italy since 1981

A celli, Ma io A icle Public De ici and Mone a y Cou se Change in I aly since 1981 Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: A celli, Ma io (1985) : Public De ici and Mone a y Cou se Change in I aly since 1981, Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol. 105, Iss. 2-3, pp. 327-339, h ps://doi.o g/10.3790/schm.105.2-3.327 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/291609 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. 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I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Public De ici and Mone a y Cou se Change in I aly since 1981 By Ma io A celli The pape aims: a) o gi e a desc ip ion o changes in he modus ope andi o mone a y policy in I aly since 1981; b) o aise ques ions ega ding he e olu ion o money ma ke s and he banking sys em a e he modi ica ions in mone a y policy in e ened since hen. The elimina ion o he ceiling on bank lending in 1983 was he las s ep owa ds a shi om adminis a i e o ms o c edi con ol o indi ec o ms. Wha a e he easons o he swi ch? Can his change be econciled wi h he size and e olu ion o he public de ici ? The pape a emp s o p o ide an answe . 1. The Changing Cou se o Mone a y Policy Mone a y policy is changing cou se in I aly, g adually bu s eadily. Wha will his b ing and how a can i go? How can his change be econciled wi h he size and e olu ion o he public de ici ? These a e undoub edly he ques ions ha need o be answe ed in o de o exam- ine he changes in he mone a y au ho i ies'ope a ional and in e media e objec i es, in he eac ions and s a egies o banks and o he inancial in e media ies, and in he e ec s on in e es a es and he money ma ke s. Howe e , be o e ackling hese ques ions i is necessa y o de ine exac ly wha is mean oday by a mone a y cou se change. In he second hal o he se en ies conside able changes ook place in he beha iou o he mone a y au ho i ies o he majo coun ies; and he high and a iable in la ion esul ed in he objec i e o s abilizing in e es a es ha ing o be abandoned and sugges ed he swi ch o in e - media e objec i es o a quan i a i e kind, including a ge s o mone- a y agg ega es, such as Ml and M2, o , in some coun ies, o c edi . Conside ing jus his aspec i could be said ha I aly p eceded o he coun ies wi h i s mone a y cou se change when i swi ched in 1974 om i s policy o in e es a e s abiliza ion, which had cha ac e ized he Bank o I aly's ac ion in he six ies, o a policy based on an in e - media e objec i e o o al domes ic c edi (TDC). Albei somewha schema ically i can be claimed ha a Keynesian mone a y policy se s ou o con ol in e es a es because hey a e OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 328 Ma io A celli seen as he main links in he mechanism o mone a y policy ans- mission. Thus he swi ch o a quan i a i e objec i e ins ead o a p ice objec i e such as in e es a es is undoub edly a mo e away om ha heo e ical posi ion. And he ailu es o Keynesian economic policy wi h ega d o in la ion go a long way owa ds explaining he wide- sp ead change in he iews o mone a y au ho i ies. Howe e , he p io i y gi en o he objec i e o o al domes ic c edi a he han a quan i y o money objec i e implied an unde lying logic s ill o a Keynesian a he han a mone a is kind. Indeed, no only was he e assumed o be a high deg ee o subs i u abili y among mos inancial asse s, which was supposed o make he ela ionship be ween TDC and he e ec i e demand mo e s able han ha be ween he la e and money o bank c edi (DCE), bu he p ocess o balance-o -pay- men s adjus men implici in he model adop ed also e lec ed a la gely Keynesian logic. In ac he appea ance o an imbalance in he inancial asse s ma ke as a consequence o a balance o paymen s de ici had e ec s on income ia he mul iplie since i e lec ed a di e ence be ween sa ing and in es men . E en hough ex e nal adjus men could also be achie ed by a ac ing unds om ab oad o o se he cu en accoun de ici , he p incipal adjus men mechanism ac ed h ough he a ioning o c edi , which educed he scope o in es men and hus changed he le el o income and he ela ed olume o impo s. The e was a e y di e en cou se change in he U.K. and he U.S., no only because a money a he han a c edi in e media e objec i e was chosen bu abo e all because he app oach became decidedly mone a is . Up un il 1979, U.S. mone a y policy was p ima ily based on money ma ke in e es a es. The aim was o keep he change in he Fede al Funds a e, which is he leading money ma ke a e, wi hin a na ow band. The mone a y au ho i ies also ga e indica ions wi h ega d o Ml and M2 bu ixed much wide anges, which, in any case, we e no binding. Howe e , when in la ion became ampan and in e es a es ose inexo ably, a mone a y policy based on in e es a es no longe an- swe ed: such a policy i sel ended o be in la iona y. In Oc obe 1979 he e was he so-called "new cou se" in he mone a y policy o he Fede al Rese e, whe eby he ope a ional aim was no longe o hold he Fede al Funds a e s eady bu o egula e bank ese es in such a way as o achie e he in e media e objec i e o a gi en g ow h a e o Ml and M2 wi hin a na ow ange. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 Public De ici and Mone a y Cou se Change in I aly since 1981 329 The se ing o quan i a i e objec i es o mone a y agg ega es seeks o p o ide a consis en mone a y answe o in la ion. I e lec s awa e- ness ha slowing down he a e o g ow h o he money supply is a necessa y condi ion o a eco e y o p ice s abili y. 2. C edi Res ic ion e sus base Con ol Wha happened in I aly du ing his pe iod and in wha sense is i possible o alk abou a new app oach on he pa o he I alian mone- a y au ho i ies indica ing a desi e o a cou se change? The ini ial eac ion o he I alian mone a y au ho i ies o he second oil c isis (1979 - 80) was o ea i m he need o s eng hen he ceiling on bank lending in o de o adjus he ex e nal imbalance ia o al domes ic c edi , o a leas o cu b i s de e io a ion. The su ge in he public sec o de ici ha occu ed a his ime o ced he au ho i ies o o se he la ge olume o lending o he public sec o by educing ha o he economy. This was achie ed by igh ening he adminis a i e cons ain s on he disbu semen o bank loans. The TDC in e media e objec i e had p o ed o be app op ia e in an eme - gency, when wha is needed is apid and e ec i e ac ion o co ec a se ious disequilib ium in he balance-o -paymen s. Ra ioning c edi has a much mo e immedia e impac han inc easing in e es a es, since he e ec s o he la e appea mo e slowly, and no only because o he ime ma e ially equi ed o implemen a es ic i e mone a y policy bu also because o he igidi y o he demand o c edi wi h espec o he le el o in e es a es. Fu he mo e, wi h a ioning one p e en s in e es a es om eaching he excessi ely high le els needed o p ice o adjus demand down o he educed supply o c edi . In many cases a simila ly excessi e ise in a es could jeopa dize he o de ly wo king o he inancial ma ke s. In 1980 and 1981, howe e , he igh ening o he ceilings on bank lending con ibu ed o some bank c edi being eplaced by lending by he special c edi ins i u ions, whose ange o ope a ions was also ex ended h ough ins i u ional inno a ions ha imply subs an ial changes in he wo king o he c edi ma ke . The mone a y squeeze, concen a ed as i has been on he banking sys em, has also s imula ed he c ea ion o a se ies o pa allel c edi channels o which he banks ha e con ibu ed h ough he de elopmen o banking- ela ed se ices, he in oduc ion o inno a ions and he expansion o c edi gua an ees. As ime has passed he mone a y au ho i ies ha e he e o e had o ackle new p oblems. The eac ion o he banking sys em o he igh en- OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 330 Ma io A celli ing o adminis a i e cons ain s on c edi and he p og essi e expan- sion o he public de ici ha e g adually educed he con ollabili y o he TDC in e media e objec i e. On he one hand his has been due o he di e gence o public expendi u e om i s planned pa h — i being impossible o comple ely o se i s o e shoo wi h educ ions in he inance g an ed o he economy — while on he o he e en he abili y o con ol c edi channels wi h adminis a i e ins umen s has g adu- ally diminished owing o banks ge ing ound he ceilings on hei lending in he ways desc ibed abo e. On op o his he e ha e been inc easing dis o ions as a consequence o he a ioned alloca ion o c edi . This has p ima ily been o he de imen o he p oduc i e sec o and wi hin his o he soundes companies. F om ano he poin o iew, he expansion o he public de ici , which has been especially as since 1979, has made i necessa y o e iew mone a y s a egy. The e was, in ac , he dange o an excessi e amoun o mone a y base being c ea ed o sa is y he g owing T easu y bo owing equi emen o , when i was desi ed o limi he c ea ion o mone a y base, in e es a es had o be aised and made highly luc- ua ing in ela ion o he di e en esponses o he ma ke a di e en imes. This dilemma could no be o e come in e ms o TDC by i sel . The composi ion o inancial asse s ha is gene a ed by a gi en le el o TDC is compa ible wi h se e al le els o banking in e media ion and hence wi h se e al le els o money supply. Fo a gi en alue o TDC he quan i y o money c ea ed will be di e en acco ding o whe he go e nmen secu i ies a e placed la gely wi h he Bank o I aly, pu - chased di ec ly by he public, o aken up by he banks, hus inc easing in e media ion. Bu i is also ue ha di e en amoun s o open- ma ke ope a ions by he mone a y au ho i ies and bank in e en ion in he secu i ies ma ke a e no incompa ible wi h a gi en amoun o TDC. Hence he need always o conside he quan i y o money ha is c ea ed in co espondence wi h he planned TDC in iew o i s e ec s on p ice in la ion and he balance-o -paymen s. These wo p oblems, he weakening o di ec c edi con ols and he need o cu b he c ea ion o mone a y base, ga e ise o a se ies o changes in he modus ope andi o mone a y policy. Du ing 1981 and 1982 he la e was es ic i e, e en hough o al domes ic c edi ollow- ed a ela i ely accomoda ing pa h. The expansion o c edi was accom- panied by high in e es a es in bo h nominal and eal e ms. The need o place an e e la ge olume o go e nmen secu i ies in o de o inance he expanding public de ici o ced he au ho i ies bo h o cu b c edi o he economy and o o e sa e s a eal yield ha would ma ch OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 Public De ici and Mone a y Cou se Change in I aly since 1981 331 he supply and demand o secu i ies. Mone a y policy became mo e es ic i e e en hough TDC expanded. This was due bo h o he es ic ions imposed on he p i a e sec o wi h he aim o pa ially o - se ing he g ow h in public sec o bo owing and o he ise in in e es a es p oduced by he cu b on mone a y base. The channels o mone- a y policy ansmission a e no longe iden i ied almos exclusi ely wi h he a ailabili y o c edi bu a e inc easingly ela ed o he eal in e es a e. This explains he a en ion paid by he mone a y au ho - i ies o a b oade ange o eal and mone a y agg ega es and a iables. This new s ance o mone a y policy is also he esul o he inc easing a en ion paid o in la ion by bo h economic agen s and he mone a y au ho i ies. Ine i ably he con ol o liquidi y comes o ha e p io i y e en o e he con ol o c edi . This explains se e al o he s eps in he change o mone a y s a egy. In he i s place he "di o ce" be ween he T easu y and he Bank o I aly in 1981, which allows he Bank o I aly o sepa a e i s esponsibili y o he c ea ion and con ol o liquidi y om he budge and Excheque policy. This choice does no signi y, howe e , ha he Bank o I aly gi es absolu e p io i y o he con ol o he mone a y base and accep s absolu ely any luc ua ion o in e es a es. A ca e ul wa ch is kep on hei le el and s uc u e, bu he Bank none heless e ains om s abilizing a es a he cos o un- con olled g ow h in he mone a y base. On he one hand he size o he con inually expanding public de ici makes he la e inc easingly di icul o inance, on he o he , i makes ules o beha iou necessa y o p e en con ol o he mone a y base being los . A e he di o ce ano he s ep along he oad o mone a y policy change consis ed in he decisions aken by he au ho i ies a he end o 1982, and especially he new egula ions ega ding compulso y e- se es. The mone a y au ho i ies had judged he g ow h in bank de- posi s in he second hal o 1982 o be oo dange ous in iew o hei in la iona y po en ial and chose a pa h ha would slow down his g ow h. F om a s uc u al poin o iew, he highe compulso y ese e coe icien on deposi s and he powe s o make a ia ions assigned, wi hin ce ain limi s, o he mone a y au ho i ies e ealed he aim o shi ing he con ol o he banks1 balance shee . This also eme ged clea ly in he measu es ha ex ended he compulso y ese e coe i- cien o epu chase ag eemen s, which allow banks o aise unds ou - side he no mal channels h ough he empo a y sale o secu i ies o cus ome s, and, on he asse side, educed he compulso y secu i y in es men equi emen , which equi es banks o pu chase secu i ies issued by he special c edi ins i u ions. The obliga ion o eplace hese secu i ies as hey ma u ed was also eased. Finally, a special measu e OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 332 Ma io A celli aimed a consolida ing he banks' liabili ies by encou aging he issue o ce i ica es o deposi . These measu es we e p epa a o y o he elimina ion o he ceiling on bank lending ha was o be implemen ed a he end o June 1983. 3. The new T ansmission Mechanism This was he inal phase o a p ocess ha had been ponde ed a leng h by he mone a y au ho i ies, who appea o see he swi ch in mone a y policy as a posi i e al e na i e o inc easingly ex ensi e and su oca - ing adminis a i e con ols. Al eady in 1981 a lucid and a sigh ed analysis o he p oblem by Go e no Ciampi had s a ed ha "i we wan o a oid weighing e en mo e hea ily on he pa o inancial lows ha a e di ec ly con olled and i , on he o he hand, he condi ions pe mi ing adminis a i e con ols o be abolished do no de elop, i will be necessa y o ex end, a he han na ow, he ange o inancing subjec o con ol. In he long un he e is a con adic ion be ween ex ending he money ma ke o include c edi ins umen s designed o p omo e he inancing o i ms by sa e s and a mone a y policy s a egy elying pe manen ly on di ec con ols. Mo eo e — Go e no Ciampi wen on — e en when he ac ion o he cen al bank is based exclusi ely on he egula ion o bank ese es and elies o i s e ec i eness on he abili y o in e es a es o in luence he demand o c edi , a b oade ange o inancial ins umen s and mo e di e si ied ma ke s educe he accu acy and speed o he e ec s o mone a y policy compa ed wi h a si ua ion in which bank c edi accoun s o a la ge p opo ion o he inancing o he economy. These d awbacks a e less se ious i changes in in e es a es become mo e luid and hence in luence he expansion o c edi mo e apidly owing o ma ke s being mo e e icien ."1 This passage would sugges ha c edi o he economy, a he han he money supply, is he ansmission mechanism ha he mone a y au ho i ies s ill conside o be mos impo an , e en hough he p oblems could appea in a di e en ligh in he u u e i he e we e g ea e di e si ica ion o he money and inancial ma ke s. This indica ion was ecen ly con i med by Fazio and Ca anza a a con e ence held in Pe ugia o examine he poli ical economy o mone a y policies o he majo coun ies.2 In I aly he limi ed de- 1 Ciampi (1981). 2 Hodgman (1983). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 Public De ici and Mone a y Cou se Change in I aly since 1981 333 elopmen o he money and inancial ma ke s compa ed wi h he g ea e e iciency o he c edi ma ke is conside ed o educe he impo ance o he money supply as a channel o he ansmission o mone a y impulses. Fazio and Ca anza none heless admi ha he impo ance o he composi ion o inancial asse s should no be unde - a ed because mone a y impulses a e p opaga ed no only h ough weal h e ec s bu also by he chain o subs i u ions in inancial po - olios. Acco ding o his in e p e a ion, he cou se change made by he I alian mone a y au ho i ies conce ns he ins umen s o he con ol o c edi agg ega es a he han he in e media e objec i es o mone- a y policy. The deg ee o c edi es ic ion is no he same hing as he ins umen s employed o ob ain i . The shi om adminis a i e o ms o c edi con ol o indi ec o ms, h ough g ea e ma ke pa icipa- ion is held o be he key aspec o he policy change. I is in his con- ex ha impo ance is aken on by con ol o he mone a y base o achie e he le el o in e es a es ha will cu b he c edi disbu sed o he economy wi hin he limi s consis en wi h he in e media e objec- i e adop ed. In sho , wha Fazio and Ca anza claim is ha " he Bank o I aly se s i sel an ope a ional a ge in e ms o mone a y base, which de e mines he le el o a key a e, ha on T easu y bills. In equilib- ium, e e y le el o his a e co esponds o a gi en a e o inc ease in bank c edi and deposi s. The in e sec ion o he supply and demand schedules o bank loans de e mines he bank lending a e and he sha es o c edi o he public and p i a e sec o s. Al hough i is always posi i e, he causal link be ween mone a y base and o al domes ic c edi is no igid and ac s ia in e es a es. I , ins ead, he aim was o in luence only he money supply, he e would ha e o be a igh e con ol o he mone a y base and in pa icu- la o bank ese es. The changes ha would occu in he le el and s uc u e o in e es a es as a esul o he change in he supply o money would g adually sp ead h oughou he sys em."3 Howe e , eal in e es a es acqui e a s a egic ole in mone a y policy managemen no only in connec ion wi h c edi con ol bu also as a means o s imula ing he p opensi y o inancial sa ing. Fu he mo e, in ela ion o he a ying size o he T easu y bo ow- ing equi emen hey con ibu e o he achie emen o equilib ium in he money and o eign exchange ma ke s. 3 Fazio and Ca anza (1983). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38 334 Ma io A celli A his poin i can be seen ha he s eps aken owa ds making mone a y agg ega es mo e and mo e impo an ha e been nei he ew no small. As i was ecen ly poin ed ou , he emphasis placed on in e es a es as a mechanism o exe ing con ol and ansmi ing mone a y policy aises ques ions wi h ega d o he claimed g ea e impo ance o he c edi ma ke compa ed wi h he money ma ke . How is he choice o be made be ween a mone a y base-money supply ela ionship and he al e na i e mone a y base-c edi ela ionship? We ha e seen he easons why i is no longe sa is ac o y o adop TDC as he in e media e objec i e o mone a y policy; basically hey can be aced back o i s limi ed con ollabili y and o he lack o s abili y o he ela ionship be ween in e media e objec i e and inal objec i e. On he o he hand he e is no e idence a p esen o sugges ha o I aly adop ion o a quan i y o money in e media e objec i e, whe he Ml o M2, ins ead o a c edi objec i e would lead o a sub- s an ial imp o emen in achie ing inal objec i es.4 The e is, howe e , clea e idence ha ole o he money ma ke s is g owing in impo - ance: he di e en ial be ween bank deposi a es and ha on T easu y bills has become a majo elemen in he egula ion o he deg ee o bank in e media ion since he public is inc easingly sensi i e o he yields on al e na i e asse s. The T easu y bill ma ke , supplemen ed by he Bank o I aly's epu chase ope a ions, has become he s a egic elemen in he con ol o liquidi y. This is impo an bo h o he igh agains in la ion and o he con ol o he o eign cu ency ese es. The Bank o I aly appea s o ake a o al olume o mone a y base as an ope a ional hypo hesis and he e o e ends pa ially o o se any excessi e des uc ion o mone a y base ia he o eign sec o channels. I , on he o he hand, he o eign sec o c ea es mone a y base, he bank ends o cu b he c ea ion o mone a y base by he T easu y. In cohe - ence wi h he la e case, du ing he i s nine mon hs o 1983 he T easu y did no c ea e mone a y base and none heless managed o place mo e secu i ies in he ma ke han o ecas , he eby neu alizing mos o he mone a y base c ea ed by he o eign sec o . This beha - iou , as i was poin ed ou , is wo h analyzing since o se ing o neu- alizing, acco ding o he case, he ex e nal componen o he mone- a y base by means o he domes ic componen is no wi hou e ec on money ma ke in e es a es and hence on he o eign cu ency ese es. I is su icien o ecall he analogy wi h he "DCE model" which p e- sc ibes ha he o eign componen o money mus no be o se o neu- alized by he domes ic componen . 4 See, o example, Dennis (1983). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/schm.105.2-3.327 | Gene a ed on 2023-04-04 12:06:38