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
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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
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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.
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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-
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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
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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
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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).
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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).
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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