Macroeconomic Instability and the Phillips Curve in Italy
35 Pages Posted: 27 May 2009 Last revised: 12 May 2014
Date Written: October 3, 2011
The theme of this paper is whether there was a textbook-like inflation-output tradeoff in post-WWII Italy. We estimate both standard and time-varying parameter models of the relationship between inflation and the level of real economic activity over the 1949 to 2010 period and find no evidence of a stable, significant and positive association between output and prices. We attribute this evidence primarily to a fiscally dominated monetary policy and a rigid indexation mechanism aimed at protecting wages from inflation. These two institutions contributed to the persistent inflation bias and macroeconomic instability that lasted almost until the entry of the country in the European Monetary Union.
Keywords: fiscal dominance, inflation, macroeconomic stability, wage indexation, Phillips curve
JEL Classification: E31, E32, J50, N10
Suggested Citation: Suggested Citation