Spanò, Ma cello
A icle
Balance-shee es uc u ing in I aly: an empi ical analysis
based on mone a y ci cui heo y
Eu opean Jou nal o Economics and Economic Policies: In e en ion (EJEEP)
P o ided in Coope a ion wi h:
Edwa d Elga Publishing
Sugges ed Ci a ion: Spanò, Ma cello (2024) : Balance-shee es uc u ing in I aly: an empi ical
analysis based on mone a y ci cui heo y, Eu opean Jou nal o Economics and Economic Policies:
In e en ion (EJEEP), ISSN 2052-7772, Edwa d Elga Publishing, Chel enham, Vol. 21, Iss. 3, pp.
440-460,
h ps://doi.o g/10.4337/ejeep.2022.0087
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/307652
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Balance-shee es uc u ing in I aly: an
empi ical analysis based on mone a y ci cui
heo y
Ma cello Spanò*
Depa men o Economics, Uni e si y o Insub ia, Va ese, I aly
Based on 25 yea s (1995–2019) o ully in eg a ed sec o al da a, his s udy builds on mone a y ci cui
heo y o examine he I alian expe ience o g owing p i a e deb ollowed by a long ecession wi h
balance-shee es uc u ing. I is a gued ha his p ocess canno be iden i ied as a ypical balance-
shee ecession. A e he global inancial c isis o 2007–2008, I alian i ms inc eased inancial sou ces
om economic ac i i ies by e aining ea nings, lowe ing wages, and disin es ing. Thei dele e age,
howe e , es ed la gely on he o e all inancial weal h ealloca ion ha occu ed a e 2012, which
was induced by mone a y and iscal policy, c ea ing he condi ions o households o inc ease ne sa ing
and o channel cumula ed weal h om go e nmen secu i ies and money balances owa ds equi ies.
Keywo ds: sou ces o inance, deb , sec o al analysis, money e lux, economic policy
JEL codes: E12, E20, E63
1 INTRODUCTION
The global ecession ollowing he 2007–2008 global inancial c isis is o en desc ibed as
he consequence o a pain ul p ocess o deb dele e aging occu ing a he ini ia i e o an
o e indeb ed p i a e domes ic sec o ( i ms and households) as soon as he s ock ma ke
collapsed. The ecession is gene a ed by he desi e o inc ease p i a e ne sa ing o pay
back he deb , no ma e how low he in e es a e goes and how much liquidi y he
cen al banks pump in o he banks’asse s (Koo 2008; Keen 2009; La oie 2014: 229;
Secca eccia/La oie 2016). No all he cases o en a i e dele e age h ough ne sa ing,
howe e , can be asc ibed o his ‘balance-shee ecession’ ype o mechanism. I aly, as
we will a gue h oughou his s udy, does no i his desc ip ion.
This s udy –in line wi h he s ock– low accoun ing adi ion (Godley/La oie 2007;
Bezeme 2010; Spanò 2019) –builds on a ully in eg a ed da a se epo ing economic
ansac ions and inancial ansac ions o sec o s in I aly o e 25 yea s, om 1995 o
2019, and analyses how eal and inancial ansac ions ha e in e ac ed wi h each o he
in I aly and wha ole was played by he economic policy be o e and a e he global
* Email: ma cello.spano@uninsub ia.i . The au ho is e y g a e ul o He é Ba on o hiscommen s
on an ea lie e sion o he manusc ip , o Ma co Ve onese Passa ella and he o he pa icipan s o he
2021 STOREP con e ence session on ‘Money, Finance and Dis ibu ion’, and o he wo anonymous
e e ees, o aluable commen s and sugges ions on imp o ing he quali y o he pape . He accep s
sole esponsibili y o any emaining e o s.
Recei ed 20 Oc obe 2021, accep ed 27 Ap il 2022
Resea ch A icle
This is an open access wo k
Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3, 2024, pp. 440–460
Fi s published online: No embe 2022; doi: 10.4337/ejeep.2022.0087
Jou nal compila ion © 2024 Edwa d Elga Publishing L d
© 2024 The Au ho
inancial c isis. The ocus on I aly is pa icula ly ele an o wo easons: i s ly, he coun-
y is equen ly conside ed a case s udy by bo h economis s om he mains eam adi-
ion, who a e conce ned by he le el o public deb , e en when hey migh ecognise ha
so e eigndeb wasno a he oo o he2007–2008 inancial c isis (Da e i/Tabellini
2000; Mundell 2012; Baldwin/Gia azzi 2015), and c i ical economis s, who a e con-
ce ned by he eu ozone’s dys unc ional se o ules (Giacché 2017; Cesa a o/Zezza
2018; Fazi 2018; Bacca o/D’An oni 2020; Spanò 2022); secondly, he I alian economic
di icul ies a e a po en ial sou ce o dis ess o he whole global economy, especially o
he eu ozone i sel , as a es uc u ing o he public deb in I aly po en ially b ings abou
sys emic consequences.
The me hodology de eloped is inspi ed by he heo y o he mone a y ci cui
(TMC), which has been in eg a ed in o he pos -Keynesian heo y o endogenous
money (Rochon 2016). The TMC, he e conside ed in he e sion o G aziani
(2003), is a logical scheme concei ed a a e y high le el o abs ac ion o analyse he
unc ion o money in he capi alis ic p ocess o p oduc ion and income dis ibu ion.
The s eng h o he TMC is o unde line he c ucial ole o c edi -d i en bank-
money c ea ion, ci cula ion and e lux, he la e being possible h ough wo channels:
he decision o spend he disposable income (wages) o pu chase goods p oduced by
domes ic i ms, and he decision o alloca e he inancial weal h o acqui e secu i ies
issued by i ms. Depending on he hypo heses we make, he closu e o he mone a y
ci cui can lead o di e en ou comes.
The empi ical analysis ca ied ou in his s udy adap s he logic o he mone a y ci cui
o he his o ically and ins i u ionally speci ic case o he I alian economy o e 25 yea s
(p e-pandemic). To his end, i sepa a es lows de i ed om bank-loan liabili ies om
hose de i ed om o he sou ces. By examining he changes in he composi ion o he
a o emen ioned ypes o lows and he way hey ha e been collec ed and used by house-
holds and i ms, his wo k iden i ies he di e en scopes o changing deb exposu e and
balance-shee i ems in I aly o e he pe iod conside ed. Subsequen ly, he analysis ocuses
on he ole played by iscal and mone a y policy and by he o eign sec o in in luencing
he inancial s uc u e o he p i a e domes ic sec o .
The emainde o his pape is o ganised as ollows: sec ion 2 p esen s he me hodology
and de i es a axonomy o iden i y he scope o inc easing o dec easing bank loans and
o ca y ou economic diagnoses; sec ion 3 desc ibes he de elopmen o households and
i ms in I aly in he ligh o sec ion 2’s axonomy; sec ion 4 analyses how hese wo sec o s
ob ained non-bank sou ces o inance; sec ion 5 examines he ole o iscal and mone a y
policy and he ole o he o eign sec o ; and sec ion 6 concludes.
2 SOURCES OF FINANCE: THEORY AND METHOD OF ANALYSIS
In his sec ion we build a gene ally alid heo e ical se , inspi ed by he TMC, whe e all
possible connec ions be ween he ne sa ing o a sec o and he change in i s bank-loan
liabili ies can be obse ed.
Acco ding o he TMC, money is ini ially c ea ed by he banks, which open a line o
c edi in a ou o he i ms o ac i a e he p oduc ion p ocess (ini ial inance); subse-
quen ly, i ms ans e new money o he wo ke s in he o m o wages, and, inally, a e
he p oduc ion is comple ed, money is ans e ed back o he i ms ( inal inance),
ei he because wo ke s pu chase he goods and se ices p oduced (non- inancial ansac-
ions), o because, wi h sa ed income, hey pu chase i ms’non-bank liabili ies, such as
equi ies o obliga ions ( inancial ansac ions). This e lux hus akes a wo old s eam,
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 441
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
and he wo lows a e egis e ed in wo di e en sec o al accoun s: he consump ion o
he wo ke s, which gene a es inancial lows a ising om non- inancial ansac ions, en e s
in o he disposable income and ne wo h om ansac ions o he i ms, whe eas he pu -
chase o secu i ies issued by he i ms, which gene a e a pu e inancial (po olio) ansac ion,
is egis e ed as a inancial liabili y o he issue and a inancial asse o he holde . A his
highe le el o abs ac ion, whe e he economy is di ided in o h ee sec o s (banks, i ms and
wo ke s), he only case in which money is no ans e ed back o he i ms is when wo ke s
decide o keep pa o hei sa ing in bank deposi s ins ead o secu i ies, in which case he
ci cui does no close, and he i ms a e no able o pay back pa o hei ini ial deb o he
banks. The implica ion is ha any educ ion o he money balances allows he i ms o
educe hei deb exposu e o he banks (G aziani 2003; Rochon 2016).
1
The s eng h o he TMC is o unde line he c ucial ole o c edi -d i en bank-
money c ea ion, ci cula ion and e lux, he la e being possible h ough wo channels:
hedecision ospend hedisposableincome(wages) opu chasegoodsp oducedby he
i ms, and he decision o alloca e he inancial weal h o acqui e secu i ies issued by
i ms. Depending on he hypo heses we make, he closu e o he mone a y ci cui
can lead o di e en ou comes. This is why he TMC should no be conside ed as a
igid model, bu as a logical scheme ha is open o his o y and o di e en ins i u ional
a angemen s and ha is applicable o di e en heo e ical and p ac ical enqui ies which
a e no ea ed in he mos abs ac scheme o G aziani (2003), including ypical Key-
nesian objec s o analysis, such as inancial c ises, low income equilib ia, he ole o eco-
nomic policy, and so on.
In his s udy, o ep esen liquidi y c ea ion, ci cula ion and des uc ion in he ligh
o he TMC amewo k, we agg ega e he wo s eams o money e lux ha a e sepa a e
in he sec o al accoun s: we build a a iable summing up he change in ne wo h om
non- inancial ansac ions and he incu ence o non-bank liabili ies in a single pe iod
(one yea ). We label his a iable non-bank sou ces o inance, which is mean o ep esen
all he liquidi y ha a single sec o is able o collec om di e en sou ces excep banks.
This is sys ema ically compa ed wi h loan liabili ies a ising om bank ela ionships wi hin
he same pe iod.
Rep esen ing he sou ces o inance in his way has a mani old ad an age. Fi s ly, i
allows us o ocus on inance in a non-con using way, as equi ies and deb secu i ies in
na ional accoun ing a e egis e ed as liabili ies o hei issue , whe eas hey a e, in a inan-
cial sense, equi alen o ‘posi i e’cash paymen s (liquidi y sou ces in he sense o inal
inance). Secondly, i makes i possible o ( empo a ily) o e look he dis inc ion be ween
sec o s in su plus and sec o s in de ici , which limi s he a en ion o he lows gene a ed
wi hin non- inancial ansac ions. Thi dly, i makes i possible o ea deb owa ds he
banking sys em as a pa icula sou ce o liabili ies, which logically comes be o e any eal
economic and inancial ac ions. Fou hly, i is consis en wi h he TMC and, mo e gen-
e ally, wi h he heo y o endogenous money.
The me hod o analysis is based on his simple sec o al accoun ing iden i y:
a−b¼c−dNB −dB:(1)
The le -hand side egis e s he ne sa ing om non- inancial ansac ions, de ined as he
di e ence be ween he change in ne wo h om non- inancial ansac ions (a) and he
in es men in eal goods (b). This balance is iden ically equal o ne inancial ansac ion
1. The heo e ical o igins o he TMC can be aced back –among o he places – o Schumpe e
(1912) and o he w i ings o Keynes be o e and a e The Gene al Theo y (Keynes 1930; 1937).
442 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
lows, on he igh -hand side, de ined as he di e ence be ween ne inancial asse acquisi-
ions (c) and ne incu ence o liabili ies, he la e being di ided in o non-bank liabili ies
(d
NB
) and bank-loan liabili ies (d
B
). Non-bank liabili ies include equi ies, deb secu i ies,
insu ance, pension unds, and all inancial liabili ies ha a e no bank loans.
Ou de ini ion o non-bank sou ces o inance is hus gi en by
F¼aþdNB:
Rea anging (1), we ob ain:
FþdB¼cþb:(2)
All possible combina ions o he wo sou ces o inance Fand d
B
can be ep esen ed in a
bidimensional space, as in Figu e 1. The igu e allows us o dis inguish be ween di e en
a eas, implying di e en scopes o changing deb exposu e.
The balance-shee symme ic enhancemen is e i ied when bo h sou ces o inance
inc ease. This can be sepa a ed in o wo sub-a eas: ‘deb anquil g ow h’and ‘ inancial
dis ess’. In he deb anquil g ow h zone, he e lux is acili a ed as he ise in he deb
le el is mo e han o se by non-bank sou ces o inance. Howe e , his should no be
unequi ocally in e p e ed as a zone o s abili y o inancial sus ainabili y. As he analysis
o Minsky unde lines, i is p ecisely du ing pe iods o appa en s abili y ha inancial
agili y is buil : he e osion o he ma gins o sa e y c ea es he condi ions o dis ess
bo owing o mee cash commi men s, e en in he p esence o a small depa u e o
Changes in
bank loans (dB)
Deb o e coming
inancial sho all
Financial dis ess
Deb anquil g ow h
BSR wi h asse g ow h
Balance-shee escue
Deb cushioning
inancial sho all
Deb educ ion
lowe han sho all
Balance-shee symme ical
sh inkage
Deb educ ion
highe han sho all
BSR wi h asse
des uc ion
Balance-shee es uc u ing (BSR)
Changes in
non-bank sou ces
o inance (F)
Balance-shee symme ical
enhancemen
No e: Shaded a ea: asse des uc ion (change in he sum o eal and inancial asse s lowe han ze o).
Figu e 1 Bank loans and non-bank sou ces o inance
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 443
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
ealisa ions om expec a ions (Minsky 1975; K egel 2008). In he inancial dis ess a ea,
bank deb inc eases mo e han he inancial lows a ising om eal economic ac i i y o
om non-bank inancial liabili ies.
The balance-shee es uc u ing (BSR) is e i ied when posi i e non-bank sou ces a e
used o educe deb exposu e. This quad an can also be di ided in o wo sub-a eas: a less
uncom o able one, whe e new non-bank sou ces aised a e only pa ially used o epay
o e hanging deb , and a mo e uncom o able one, whe e deb epaymen is highe
han newly aised sou ces, which in u n implies some des uc ion o o al asse s.
The balance-shee symme ic sh inkage is he case o ull c isis and sec o al bank up cy,
whe e he sec o e i ies a sho all in bo h non-bank and bank-loan sou ces and,
ob iously, o al asse des uc ion.
The balance-shee escue is he case whe e he sec o aises deb o o se non-bank
sou ces sho all. New bank-loan liabili ies could only pa ially o se he inancial sho -
all, in which case he scope o aising deb is o cushion he all, o hey could mo e han
o se inancial sho all, in which case he scope o aising deb , besides cushioning, is
also o inc ease ( eal o inancial) asse s.
The TMC amewo k, om which he abo e me hodology is inspi ed, is usually con-
side ed no sui able o exe cises o applied economics o wo easons: i s ly, in sec o al
accoun ing i is no possible o dis inguish be ween ini ial and inal inance, and, secondly,
he TMC scheme mo es a a high le el o abs ac ion.
2
The i s limi a ion is unsol able. In he accoun ing i em epo ing changes in loan
liabili ies, all liabili ies inc eased and educed wi hin he yea a e balanced; by simply look-
ing a he balancing alue, i is no possible o es ablish whe he , o example, a ise in
sec o al deb is he esul o insu icien liquidi y collec ion, making i impossible o
educe he deb exposu e ( inal inance) o is he esul o some addi ional c edi -d i en
money issued by banks (ini ial inance) which is s ill ci cula ing in he economy. This lim-
i a ion will be pa ially o e come, and he in e p e a ion will be eased, in his wo k, by
conside ing he change in loan liabili y lows no in isola ion, bu in connec ion wi h
changes in o he sou ces o inance as de ined and desc ibed abo e.
As a as hesecondlimi a ionisconce ned, he highly abs ac scheme o he ci cui
needs o be adjus ed o include some c ucial cha ac e is ics o a complex mode n econ-
omy. In his s udy, he ollowing cha ac e is ics o all ad anced ma ke economies will
be aken in o accoun : i ms a e no he only secu i y issue s; secu i ies can be o di e -
en ypes (equi ies, bonds, and o he ca ego ies); he e a e inancial co po a ions ha a e
no banks and do no c ea e money; banks a e no pu e money c ea o s bu hey supply
a wide ange o inancial se ices; banks do no issue c edi o i ms only, bu hey gen-
e a e c edi di ec ly o households o o o he sec o s, especially in inancialised econo-
mies (Secca eccia 2012; Passa ella Ve onese 2014; Sawye /Passa ella Ve onese 2017);
he household sec o is only a p oxy o wo ke s; he non- inancial co po a ion sec o
is only a p oxy o i ms; and he o eign sec o and he go e nmen sec o in e ac
wi h he p i a e domes ic sec o s.
The p esence o a o eign and a go e nmen sec o , in pa icula , b ings abou wo
impo an consequences. The i s one is ha hese sec o s a e esponsible o addi ional
sou ces o money c ea ion, ci cula ion and des uc ion ha can be conside ed ex e nal o
he mone a y ci cui based on bank c edi : he public expendi u e no co e ed by axes
2. A ecen empi ical assessmen based on he TMC is he s udy o Fo ges Da anza i/T a ican e
(2018), which in es iga es c edi es ic ion in I aly compa ed o Ge many and F ance, in connec-
ion wi h mone a y and iscal policy.
444 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
and he balance o paymen s.
3
The second consequence is ha money balances a e no he
only ‘sink’p e en ing money om e u ning o he i ms. The e lux can also be in e -
up ed when wo ke s pu chase deb secu i ies issued by he na ional go e nmen o any
inancial asse issued by some o eign esiden .
The empi ical analysis is based on a ully in eg a ed da a se epo ing non- inancial
ansac ions and inancial ansac ions in I aly on a sec o -by-sec o basis o e 25 yea s
(1995–2019). Da a a e consolida ed, hus hey exclude in e -sec o al inancial lows, o
ocus on he ela ionship ac oss sec o s aken as agg ega e uni s. Da a ha e been collec ed
om Eu os a annual sec o accoun s (ESA2010).
4
3 NON-BANK SOURCES OF FINANCE AND BANK-LOAN LIABILITIES:
THE ITALIAN ECONOMY
This sec ion commen s on he de elopmen o he sou ces o inance a ailable o he eal
p i a e domes ic sec o s, he households (HH) and he non- inancial co po a ions (NFC),
whose pa h is illus a ed in Figu e 2.
The HH sec o has always gene a ed non-bank sou ces o inance, mainly om
sa ing,
5
consis en wi h i s ypical ole in he economy, as well as wi h he ole o he
‘wo ke s’in he TMC. F om 1995 o 2010, he sec o lay wi hin he a ea ha in he
las sec ion (Figu e 1) was classi ied as ‘deb anquil g ow h’, whe e he bank-loan liabil-
i ies a e lowe han non-bank sou ces o inance. Howe e , i can be clea ly obse ed ha
he sec o slipped p og essi ely owa ds a mo e le e aged posi ion, by inc easingly aising
deb owa ds banks un il he beginning o he global inancial c isis, in 2007, bo h
in absolu e e ms ( he yea ly addi ion wen om a ound 1.5 pe cen o GDP in
1995–1998 o a ound 4 pe cen in 2004–2007) and in ela i e e ms ( he a io be ween
bank-loan and non-bank sou ces inc eased cons an ly). Also con ibu ing o he ise o he
le e age was he sha p all o HH sa ing, which hal ed in a couple o yea s, om a ound
12 pe cen in 1995 o a ound 6 pe cen in 1998 –due o iscal es ic ions, labou
e o ms, and exchange- a e pegging policies ca ied ou o en e he Eu opean Economic
and Mone a y Union (EMU) –and which was sha ply educed again a e he global
inancial c isis, om a ound 6 pe cen in 2007 o a ound 2 pe cen in 2011 (Figu e 3).
The ini ial eac ion o he HH sec o o he global inancial c isis, om 2007 o 2011,
was o educe he addi ional deb added e e y yea , no o dec ease he deb exposu e. The
ac i e deb educ ion was ca ied ou be ween 2012 and 2015, when he sec o mo ed
in o he a ea ha we ha e classi ied as ‘BSR wi h asse g ow h’. I should be unde lined,
he e o e, ha households in I aly did no ollow he ypical pa h o a balance-shee eces-
sion, in ha hei bank-loan dele e age was no ca ied ou spon aneously as he c isis
3. The ole o he s a e as money c ea o is hea ily emphasised by mode n money heo y (MMT)
(Ne sisyan/W ay 2016; W ay 2019). No by chance, as Pa guez (2002) –among o he s –obse ed,
MMT ex ends he mone a y ci cui logic o go e nmen spending, axa ion, and bond issuance. As a
ma e o ac , he ci cui o s a e money is iden ically desc ibed by bo h neo-Cha alis s (Tymoigne/
W ay 2013) and ci cui is s (Passa ella Ve onese/Sawye 2014).
4. Non- inancial ansac ions (nasa_10_n _ ), inancial ansac ions (nasa_10_ _ ), and inan-
cial balance shee s (nasa_10_ _bs).
5. The label ‘sa ing’ e e ed o sec o s and adop ed h oughou his pape is equi alen o he
accoun ing de ini ion o ‘changes in ne wo h due o sa ing and capi al ans e s’. This, in u n,
is gi en by disposable income less consump ion o ixed capi al less inal consump ion expendi u e
plus changes in pension und ese es plus ne capi al ans e s.
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 445
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
5
42007
HH sec o
3
2
Changes in bank loans
1
2012–2015
Changes in non-bank sou ces o inance
0
1234567891011
1995
12 13
–1
NFC sec o
2008 2000
2007
1995
2002
2012
–2
0
2
4
6
8
10
–4
–2 –1 1023456
2018
2019
2017
2013
2010
1998
2001
Changes in bank loans
Chan
g
es in non-bank sou ces o inance
2019
0
Figu e 2 Changes in non-bank sou ces and bank-loan liabili ies (pe cen age o GDP)
446 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
s a ed (and s ock p ices ell), bu s a ed a he same ime as he hea y iscal con ac ion in
2012, which was only pa ially so ened in he ollowing yea s. Despi e i s sa ing being a
a his o ic low, he I alian HH sec o gene a ed su plus wi h he pu pose o educing i s
deb exposu e only a e 2013, mainly h ough cu ing he expendi u e on in es men .
The NFC sec o , as we ha e unde lined, aises non-bank inance om bo h non- inancial
and inancial ansac ions. F om Figu e 2 we can obse e ha , be o e he global inancial
c isis, NFC luc ua ed ac oss he wo a eas o ‘deb anquil g ow h’(1996–1998 and
2001) and ‘ inancial dis ess’(1995, 1999–2000 and 2002–2007). F om 2002 o 2006,
he g ow h o bank deb was mo e han p opo ional bu quan i a i ely compa able wi h
he g ow h o non-bank sou ces (equi ies). The la e ell in 2007, lea ing he inancial dis-
ess condi ion o NFC much mo e e iden .
The yea s ollowing he global inancial c isis we e u bulen . In 2008, NFC inc eased
bank-loan exposu e o keep inc easing asse s despi e he non-bank sou ces sho all. 2009
was a single yea o deb educ ion (wi h posi i e non-bank sou ces) ollowed by wo o he
yea s o inc easing deb . The BSR o he NFC sec o s a ed in 2012, as well as o he
HH sec o , and i can be conside ed o las un il 2019, wi h he only excep ion being he
yea 2018, when deb exposu e inc eased. The e o e, o he NFC sec o oo i is possible
o iden i y wo di e en pos -c isis pe iods: a i s one, whe e he sec o simply seems o
s uggle o su i al, ying o cushion empo a y sho alls and es o e economic ac i i y,
and o his pu pose i does no hesi a e o inc ease bank deb , al hough o a lesse ex en
compa ed o he p e ious yea s; and a second one (2012–2019), whe e he sec o uses
inancial sou ces ob ained om ei he i s economic ac i i y o he inancial ma ke o
educe i s deb exposu e o he banking sec o .
1996
1997
in es men a e
–2.0
0.0
2.0
4.0
6.0
% o GDP
8.0
10.0
12.0
14.0
Chan
g
e in ne wo h due o sa in
g
and ca
p
i al ans e s
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1995
Figu e 3 Sa ing and in es men o he HH sec o
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 447
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
Table 3 Sec o al balances and ex e nal sou ces o inance: yea ly a e age in million €a 2015 cons an p ices and as pe cen age o GDP
1995–1998 1999–2001 2002–2006 2007–2011 2012–2014 2015–2019
(1) Go e nmen ne bo owing 72 207 41 393 57 324 59 167 47 640 38 131
4.95 2.46 3.27 3.37 2.92 2.24
(2) Cu en and capi al accoun 36 056 6 876 −8 821 −42 233 16 617 41 416
2.40 0.42 −0.49 −2.39 1.02 2.42
(3) Au onomous o eign inancial in lows –−11 059 20 863 −14 929 4 955 −74 599
–−0.67 1.17 −0.84 0.30 −4.40
Po olio in es men s –−16 575 17 517 11 380 7 746 −76 894
–−1.01 0.97 0.62 0.47 −4.54
Fo eign di ec in es men s –5 515 3 347 −26 309 −2 791 2 295
–0.34 0.20 −1.46 −0.17 0.13
Ne sa ing o p i a e sec o : (1) þ(2) 108 263 48 269 48 503 16 934 64 257 79 547
7.35 2.88 2.77 0.98 3.94 4.66
Financial sou ces om o eign sec o a ailable
o non-banks: (2) þ(3)
–−4 184 12 042 −57 163 21 572 −33 183
–−0.25 0.68 −3.23 1.32 −1.98
To al ex e nal inancial sou ces a ailable o
non-banks: (1) þ(2) þ(3)
–37 209 69 366 2 005 69 212 4 948
–2.21 3.95 0.14 4.24 0.26
454 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
whe e (S−I) is he ne sa ing o he p i a e domes ic sec o and (G−T)is he iscal
de ici . Using (3), his iden i y can be e-exp essed as ollows:
ðS−IÞþðFDI þPIÞ¼ΔNFPBþðG−TÞ:(5)
The le -hand side o (5) ep esen s he o al ex e nal sou ces o inance a ailable o he
non-bank domes ic p i a e sec o , epo ed in he bo om line o Table 3. The igh -
hand side di ides his quan i y in o he wo channels esponsible o i s c ea ion: he o -
eign sec o (ΔNFP
B
) and he go e nmen (G−T). Equa ion (5), he e o e, can be use ul
o assess how he non-bank sou ces o inance c ea ed ex e nally could ha e helped o hin-
de ed he non-bank domes ic p i a e sec o when i came o educing i s deb exposu e.
As Table 3 epo s and as o he s udies ha e emphasised (Lapa i sas e al. 2012;
Macqua ie Resea ch 2017; Mody 2018; S o m 2019), be o e he c isis o 2007–2008,
o e seas au onomous inancial in lows in I aly we e ela i ely abundan and mo e han
o se he de ici in he cu en accoun , p o iding he non-bank sec o wi h a yea ly a e -
age ne inancial in low o 0.68 pe cen o GDP be ween 2002 and 2006. As we saw in sec-
ion 4, he go e nmen du ing he same pe iod was no oubled by ul illing Eu opean
Commission ecommenda ions. As a esul , he o al ex e nal inancial sou ces a ailable
o he non-bank domes ic p i a e sec o we e equal o 3.95 pe cen on a e age. As we
ha e seen, howe e , hese sou ces did no p e en ei he he HH o NFC sec o s om
inc easing hei deb exposu e o he banks. F om 2007 o 2011, he ou lows o he au on-
omous o e seas inancial capi al (due o he o eign di ec in es men s componen ) added o
he cu en accoun de ici and gene a ed a inancial d ain h ough he o eign channel
(−3.23 pe cen ), which was jus o se by he public sec o ’s de ici . The ne e ec was a all
in he o al ex e nal inancial sou ces om 3.95 pe cen in 2002–2006 o 0.14 pe cen in
2007–2011, which ce ainly did no encou age he HH and NFC sec o s o pay back he deb .
The dele e age o bo h he HH and NFC sec o s s a ed only om 2012, simul aneously
wi h a changed app oach o economic policy. Membe coun ies o he eu ozone signed a
commi men ( he Fiscal Compac ) o ca y ou mo e se e e iscal aus e i y, whe eas he
ECB ac i ely engaged in ac ions aimed a lowe ing he in e es a es o go e nmen secu i ies.
This app oach was adop ed h oughou he pe iod 2012–2019, al hough i can be di ided
in o wo sub-pe iods, ha is, be o e and a e he QE.In his policy change we can dis inguish
wo ac o s ha con ibu ed o igge ing he dele e age ha he p i a e sec o was eluc an
o ca y ou .
The i s ac o is he lowe ing le el o he in e es a es on go e nmen deb secu i ies.The
ECB announced he decision o lowe he policy a e in No embe 2011. I ca ied ou liquid-
i y injec ion h ough la ge long- e m e inancing ope a ions (LTROs) in Decembe 2011 and
Feb ua y 2012, bu hey we e insu icien o b ing he long- e m bond yield sp eads wi h he
Ge man bund unde con ol. Sp eads ac oss he eu ozone s a ed o lowe only om July
2012, when he ECB announced he Ou igh Mone a y T ansac ions p og amme and
made i clea , wi h Ma io D aghi’s amous speech in July 2012, ha i would ha e played
a leading ole in he design and implemen a ion o he economic policy o he eu ozone
(c . ECB 2012; Feb e o e al. 2018). The pe cep ion o a lowe isk o de aul on (o ede-
nomina ion o ) go e nmen deb induced he p i a e inancial sec o o pu chase go e n-
men deb secu i ies. The ising p ices o he ou s anding s ock o deb secu i ies, on he
o he hand, incen i ised an in ensi e selling by he HH sec o . Wi h he liquidi y ob ained,
he HH ini ially paid back pa o i s deb and, again, inc eased money balances (Figu e 5).
The liquida ion o he s ock o deb secu i ies on he pa o he HH sec o s a ed o low
owa ds he NFC only when households subs i u ed equi ies o deb secu i ies, a e 2013.
The eco e y o he s ock ma ke was p ecisely he esul o he economic policy aimed a
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 455
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
lowe ing he in e es a es and can be in e p e ed, in he ligh o he TMC, as one impo an
channel d i ing he e lux om p e iously accumula ed ‘bu e s ock’o weal h (money bal-
ances and go e nmen deb secu i ies) o he NFC sec o , which in u n ecei ed a new
injec ion o non-bank sou ces o inance o pay back i s deb .
A second ac o helping o acili a e he closu e o he ci cui was he se e e iscal con-
ac ion ha occu ed in 2012 and pe sis ed in he ollowing yea s. As Table 3 epo s, he
yea ly a e age ne bo owing o he go e nmen d opped by nea ly €11.5 billion (mea-
su ed a 2015 cons an p ices), ha is, in 2012–2014 i was 19 pe cen less han in
2007–2011. This iscal aus e i y has de e mined a all in he disposable income equal
o nea ly €23.4 billion o he HH sec o and o only €1.3 billion o he NFC sec o
(see Table 2). A i s glance, he s a emen ha he iscal es ic ion helps he p i a e sec-
o o dele e age is qui e coun e -in ui i e. Le us ecall ha , when he p i a e sec o seeks
o dele e age, he less pain ul s a egy o a go e nmen should a he be o o se a long-
e m alling demand by ca ying ou a p oac i e iscal policy enhancing de ici spending
(Koo 2008; Secca eccia/La oie 2016). Gi en he cons ain s o he EMU, which p e en
such a policy being ca ied ou wi hou incu ing punishmen in he inancial ma ke
while he cen al bank s ands s ill (La oie 2014: 500; 2015; Mi chell 2016; Mody
2018), in I aly a he he opposi e s a egy was adop ed.
As a gued in Spanò (2022), he iscal con ac ion which s a ed in 2012 had he con-
sequence o b eaking he line o esis ance ha , om he beginning o he global inancial
c isis, induced households o keep hei consump ion le els as unchanged as possible,
educing hei su plus and pos poning deb epaymen . F om 2012, he HH sec o con-
ac ed he expendi u e signi ican ly, and i s su plus s a ed o ise a e 2013 (Figu e 3).
No su p isingly, om 2012 o 2014, he NFC sec o bene i ed om an a e age annual
ise in non-bank liabili ies (equi ies, deb secu i ies, and pension unds) equal o 2.53 pe
cen o GDP (Table 1). This sou ce o non-bank inance was signi ican ly highe han he
su plus ha he NFC sec o gene a ed h ough he disposable income edis ibu ion and
h ough he alling in es men (0.35 pe cen ).
As a as he o eign sec o is conce ned, a e he all in GDP ha occu ed in 2012, he
cu en accoun u ned om a decade-long sou ce o money d ain o a sou ce o money
injec ion: 1.02 pe cen in 2012–2014, inc easing o 2.42 pe cen in 2015–2019. The con-
ibu ion o he o eign sec o o gene a ing inancial sou ces o he non-bank p i a e sec-
o , howe e , can be asc ibed mo e o he iscal aus e i y, which gene a ed a con ac ion in
he demand o impo s, han o a enewed us in he I alian asse s. The o eign di ec
in es men emained nega i e om 2012 o 2014 and u ned o a posi i e balance only
in 2015–2019.
Rega ding he QE pe iod, om 2015 o 2018, we can ha dly say ha i was a u ning
poin om he poin o iew o he mone a y ci cui , as he economic policy emained based
on low in e es a es on deb secu i ies, and on iscal aus e i y. F om 2015 o 2018, he
ECB d ained deb secu i ies massi ely, a an annual a e age o 2.94 pe cen o GDP.
This, besides inunda ing he banking sec o wi h bank ese es, induced he non-banking
inancial sec o o subs i u e equi ies and o he asse s o deb secu i ies in i s balance shee
(2.32 pe cen annual a e age). As a esul , as Figu e 6 illus a es, om 2016 o 2019, equi-
ies issued by he NFC sec o (annual a e age o 1.57 pe cen ) we e highe han equi ies
accoun ed as di ec ly pu chased by HH (0.21 pe cen ). Bu conside ing ha non-bank
inancial co po a ions a e in e media ies o households’po olio decisions, he inal
esul , om he pe spec i e o he mone a y ci cui , is he same as be o e he QE, ha
is, a posi i e and s able low o inance om he HH o he NFC sec o .
O e all, du ing he pe iod o deb secu i y sh inking (2015–2018), he non-bank
liabili ies o he NFC sec o inc eased by 2.34 pe cen o GDP annually on a e age.
456 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
This was, once again, he majo sou ce o inance ha allowed he NFC o dele e age, as
he ne wo h gene a ed om economic ansac ions in he same pe iod was equal o 0.94
pe cen only.
Du ing he yea s o QE, he ex e nal sou ces o inance gene a ed by he o eign sec o
u ned again o nega i e alues (−1.98 pe cen on a e age). The ou low o he au ono-
mous inancial capi al (−4.40 pe cen ) was due o wo main ac o s: o eigne s selling I a-
lian deb secu i ies and domes ic esiden s pu chasing o eign equi ies. The i s ac o was
simply he e ec o he ECB d aining I alian deb secu i ies om he inancial ma ke .
The second ac o is illus a ed in Figu e 6 and is no peculia o he QE pe iod, bu
occu ed h oughou he whole pe iod o BSR, om 2012 o 2019. The nega i e alue
o he ne equi y asse acquisi ions o he o eign sec o is a measu e o a sink in he
domes ic e lux (which adds o he accumula ion o money balances and go e nmen
deb secu i ies al eady examined), as i implies ha an impo an sha e o he equi y pu -
chased by he domes ic economy was issued by o eign companies.
In he ligh o his assessmen o he economic policy, we should now be able o es ab-
lish clea ly ha he ecession associa ed wi h BSR which occu ed in I aly a e 2012 was
di e en om a ypical balance-shee ecession in a leas h ee espec s: i s ly, i was no
ca ied ou a he ini ia i e o an o e indeb ed p i a e sec o , bu was hea ily induced by
bo h iscal and mone a y policy; secondly, i was no igge ed by asse -p ice collapse, bu
was made possible by (policy-induced) asse -p ice eco e y; and, hi dly, is was based mo e
on inancial weal h ealloca ion han on inc easing ne sa ing (Spanò 2022).
6 CONCLUSION
This s udy has examined he I alian expe ience o g owing p i a e deb ollowed by a long
ecession wi h a balance-shee es uc u ing by assessing, i s ly, how he lows o inance
10.0010.00
8.008.00
6.006.00
4.004.00
2.002.00
0.000.00
% o GDP% o GDP
–2.00–2.00
–4.00–4.00
–6.00–6.00
20122012
20132013
20142014
20152015
20162016
20172017
20182018
20192019
BanksBanks Non-bankNon-bank
NFC new e
q
ui
y
issuesNFC new e
q
ui
y
issues
HHHH
RoWRoW
Figu e 6 Ne equi y asse acquisi ions s NFC new equi y liabili ies
Balance-shee es uc u ing in I aly: an empi ical analysis based on mone a y ci cui heo y 457
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
we e collec ed and used by he eal domes ic sec o s (households and i ms), and, sec-
ondly, wha he ole played by he poli ical economy and by he o eign sec o was.
The assessmen was based on he empi ical obse a ion o 25 yea s o ully in eg a ed sec-
o al da a epo ing economic and inancial ansac ion lows and s ocks.
The me hod o analysis, inspi ed by he mone a y ci cui heo y, has buil on a sepa a-
ion be ween bank loans and non-bank sou ces o inance, he la e agg ega ing all he
liquidi y ha a single sec o is able o collec om all sou ces excep banks, ha is, ei he
eal economic ac i i ies (changes in ne wo h om non- inancial ansac ions) o inancial
ansac ions (changes in equi y o deb secu i y liabili ies). Based on his sepa a ion, a
comple e axonomy o inancial and economic condi ions a ec ing he sec o al balance
shee has been es ablished ( oughly: balance-shee symme ical enhancemen , escue, sym-
me ical sh inkage, es uc u ing), implying di e en scopes o inc easing o dec easing
bank-loan liabili ies. This me hod allows us o analyse he money e lux no in he pu ely
abs ac logic o he TMC, whe e domes ic i ms’indeb edness should be exac ly equal o
he money wage bill, bu in a mo e ealis ic economy, whe e domes ic i ms’indeb edness
can be he consequence o households holding cash balances o secu i ies issued by o he
sec o s o he economy, such as he go e nmen o o eign companies o ins i u ions (G a-
ziani 2003: 31–32 and 70; Rochon 2016: 89).
F om he empi ical e idence i has been possible o iden i y wo di e en pos -c isis
pe iods in I aly: a i s one (2009–2011) whe e bo h i ms and households kep inc easing
bank loans in o de o cushion sho alls expec ed o be empo a y, o es o e economic
ac i i y and o keep expendi u e as simila as possible o p e-c isis le els; and a second
one (2012–2019) whe e bo h i ms and households educed deb exposu e o he banking
sec o , he i ms by using inancial esou ces d ained om ei he economic ac i i y o he
inancial ma ke , he households by educing expendi u e, mainly in es men , and by sell-
ing inancial asse s, mainly deb secu i ies, om he exis ing s ock.
The main s a egy o he i ms o inc ease inancial sou ces om economic ac i i ies
was based on e ained ea nings and lowe wages a he han on inc easing e enues
om ansac ions. They eached anomalous su plus posi ions ha con inued e en a e
he yea 2016, when sec o al disposable income and ne wo h eco e ed o p e-c isis
le els. This a i ude, which ex ended he pe iod o economic s agna ion, looks ha dly jus-
i iable om an accoun ing iewpoin , whe eas i can be explained by he p oduc i e spe-
cialisa ion in low and low–medium echnology ac i i ies coupled wi h GDP s agna ion
induced by iscal aus e i y. In addi ion o d aining disposable income om households,
i ms inc eased inancial lows h ough issuing new equi ies. The la e was, indeed, he
main sou ce o inance, allowing he non- inancial co po a ions o educe hei deb expo-
su e o banks.
A e 2012, he join iscal and mone a y policy can be in e p e ed as he a emp o
ease he closu e o he mone a y ci cui by igge ing he dele e age ha he p i a e sec o
was eluc an o ca y ou spon aneously. Gi en he eu ozone’s ame o ules ha p e en
he go e nmen s om inc easing de ici spending, he mone a y e lux was no based on
s imula ion o agg ega e demand and eal p oduc i e capaci y, bu on channelling cumu-
la ed inancial weal h om go e nmen secu i ies and money hoa ds owa ds equi ies
while o cing eal expendi u e con ac ion o s agna ion. This esul was also pu sued
by sh inking go e nmen deb secu i ies du ing he pe iod domina ed by he QE mone-
a y policy (2015–2018).
The o eign sec o is a sou ce o inance, besides he iscal de ici , which is ex e nal o
domes ic bank c edi , he eby po en ially easing he domes ic e lux. This sou ce, how-
e e , was ne e abundan du ing he pe iod conside ed. Be o e he 2007–2008 c isis,
au onomous o e seas capi al in lows we e la gely o se by de ici s in he cu en accoun .
458 Eu opean Jou nal o Economics and Economic Policies: In e en ion, Vol. 21 No. 3
© 2024 The Au ho Jou nal compila ion © 2024 Edwa d Elga Publishing L d
F om 2007 o 2011, he o eign sec o d ained money in bo h cu en and inancial
accoun s. A e 2012, while, on he one hand, he ecession b ough he cu en accoun
o a posi i e balance, on he o he hand, he inancial weal h ealloca ion was pa ially
di ec ed owa ds equi ies issued by o eigne s.
O e all, despi e some simila i ies, he I alian ecession coupled wi h balance-shee
es uc u ing, which occu ed a e 2012, di e s om he balance-shee ecession obse ed
elsewhe e in h ee espec s. Fi s ly, in I aly, he sou ces o money e lux elied mo e on
po olio ealloca ion o he exis ing weal h han on e enues and sa ing om economic
ansac ions. Secondly, he deb dele e age was no ca ied ou a he ini ia i e o he p i-
a e sec o , bu was en i ely induced by bo h iscal and mone a y policy. Thi dly, i was
no igge ed by asse -p ice collapse, bu was made possible by (policy-induced) asse -p ice
eco e y. In sho , in I aly i was he ecession ha caused he dele e age, a he han he
o he way ound.
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