Fiscal Dominance and Money Growth in Italy: The Long Record (original) (raw)

1999, Ssrn Electronic Journal

Fiscal dominance, that is the extent to which government deficits condition the growth of the money supply, has been the prevailing regime in Italian monetary history from the creation of the state in 1861 to the 1980s. The nature of the institutional structure linking budget deficits to monetary base creation has changed over time. In the early days, the profit-seeking banks of issued exceeded intermittently the legal ceiling on their outstanding currency to lend to government. The influence of public finance on monetary policy became even stronger, first, in the 1930s and, later, in the 1970s. The joint event of an independent central bank and lower budget deficits are responsible for a reversal of fiscal dominance ion the 1980s and the 1990s. JEL Classification: E51, E58, N13, and N14. 1 1 where S = interest-bearing government securities, GE = total government expenditures, excluding interest payments, T = total tax revenues, and TR = transfer to government by the central bank (i.e., seigniorage).