In Search of Monetary Policy Measures: the Case of Italy in the 90s

The Bernanke and Blinder Model in an Open Economy: The Italyn Case

“…The Bernanke and Blinder model in an open economy yields, then, a theoretical interpretation of the partial independence of Italy's monetary policy stance within the EMS. This stylized result, widely recognized in the literature (Bertocco, 1997;Grande;Smets, 1997;De Arcangelis and Di Giorgio, 1998;Gaiotti et al, 1998), is generally attributed to the presence of restrictions on international capital mobility until 1990. Moreover, it is also partially explained, in the studies that also analyze the late 1990s, by the period of flexible exchange rates between September 1992 and November 1996.…”

“…Monetary aggregates cannot be viewed as correct indicators of monetary policy, as they combine elements of both money supply and money demand. The adequacy of employing a short-term money market interest rate as a policy instrument for the Italian case is stated, among others, by Ansuini et al (1992), Amisano et al (1997), De Felice andEsposito (1995) and De Arcangelis and Di Giorgio (1998). 11.…”

“…In that period, the abolition of the wage indexation mechanism loosened the Figure 5 The effects of an increase in the spread (20 basis point increase in the loanbond interest spread). Periods: 48 months after the shock link between demand pressure and increase in prices (higher elasticity of the AS curve), while the development of a secondary market for government securities and the removal of restrictions on international capital mobility allowed monetary policy to have a larger influence on price expectations (De Arcangelis and Di Giorgio, 1998;Gaiotti et al, 1998). The monetary tightening highlights the efficacy of the credit channel (the loan-bond spread opens up significantly from the second month, see Figure 3d), whereas the exchange rate channel does not work as predicted by the traditional theory: after an interest rate increase a short-run depreciation occurs (Figure 3e).…”

“…This can be explained by the central bank's behavior before and after the exchange rate crisis. In particular, the central bank, in the period before the crisis could let the interest rate fall to a very low level, below the equilibrium value but quickly gears it up right after the revaluation in order to defend the exchange rate parity (De Arcangelis and Di Giorgio, 1998Giorgio, , 1999. This behavior characterized the large swing in money market rates not only during the realignment episodes within the EMS but also in correspondence with several episodes of large fluctuations in exchange rates over the flexible-exchange-rate regime .…”

Monetary Policy, Credit and Aggregate Supply: The Evidence from Italy

“…We have not run specific statistical tests, but we have relied on already existing evidence and practice in Italian studies pointing to the overnight rate as a good measure of the monetary policy stance in Italy (Angeloni, 1994;De Arcangelis and Di Giorgio, 1998;Buttiglione and Ferri, 1994). As shown by Figure 4, where the discount rate, the overnight rate and the average lending rate of banks are reported, the whole set of rates tends to move concomitantly.…”