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Governor Baffi’s View on the Italian Great Inflation

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Abstract

Baffi’s interpretation of Italy’s Great Inflation in the 1970s departs from the interpretations it traditionally receives. Traditional interpretations bring back inflation to the need to cover public deficits or to the prevailing type of industrial relations and to high wage dynamics. Baffi departs from these explanations and sees inflation as the outcome of a social conflict. This conflict, however, is not limited to income distribution but also relates to wealth distribution. According to Baffi inflation, reducing saving, had a penalizing effect on economic growth.

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Fig. 1

Source: Bank of Italy, Annual Report, various years

Fig. 2

Source: Bank of Italy

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Notes

  1. See Fratianni and Spinelli (2001a).

  2. For a survey of these interpretations, see, among others, Nelson (2004) and Meltzer (2005).

  3. See Blinder (1982) and Blinder and Rudd (2008).

  4. See Barsky and Kilian (2000, 2002) and Nelson (2004, 2005).

  5. See Christiano and Gust (2000).

  6. See, among others, Valcamonici (1973), Del Monte (1973), Ferretti (1974) and Sylos-Labini (1972).

  7. For a critical analysis of this literature, see, among others, Spinelli (1980).

  8. See, in particular, Modigliani and Padoa-Schioppa (1978).

  9. See Sargent and Wallace (1981).

  10. See also Favero and Spinelli (1999).

  11. See Fratianni and Spinelli (2001b; chs. 4 and 10).

  12. See Monti (1989).

  13. See Carli (1974; p. 27).

  14. See Ciocca and Nardozzi (1993) and Toniolo (1999).

  15. See Gaiotti and Secchi (2012).

  16. See Tabellini (1987).

  17. See Monti (1989).

  18. See Draghi (2011).

  19. See Tullio and Ronci (1997).

  20. See Baffi (1979; p. 159).

  21. See Kindleberger (1984; p. 14).

  22. See Friedman (1956; 1960), Johnson (1972).

  23. See Baffi (1979; p. 378).

  24. See Hirschman (1985; p. 58).

  25. See Tobin (1981).

  26. See Maier (1984) on German hyperinflation.

  27. See Ciampi (1979; p. 23).

  28. See Baffi (1976a; p. 212). Baffi gave a different interpretation of inflation in 1964, which he considered as wage inflation. He saw that type of inflation as “… characterized by a shift in the distribution of income towards employees, by a reduction in investments, caused by the contraction of profits.” Baffi (2011; p. 17).

  29. See Baffi (1975).

  30. See Baffi (1975).

  31. See Baffi (1976a; p. 425).

  32. See Baffi (1976a; p. 425).

  33. Since the 1990s, with the priority given by central banks to price stability and with the globalization process that occurred in the 1990s, the pressure capacity of trade unions has been weakening, consequently the slope of the Phillips curve has decreased and inflation expectations have been better anchored. Today the distributive conflict has assumed different characteristics from the 1970s: the balance of power between the different interest groups have changed. In the 1970s, on the contrary, the inflationary process was fuelled by the distributive conflict both directly through the excessive growth of nominal wages compared to productivity and indirectly through its impact on budget policy. See Mishkin (2007), Cecchetti et al. (2007) and Blanchard and Gali (2007).

  34. See Modigliani (1975).

  35. Because of this, the oil shock had more significant effects on domestic inflation than in other industrialized countries. See Giavazzi and Spaventa (1989).

  36. See Baffi (1976a; p. 430).

  37. See, in particular, Baffi (1969) and (1976b).

  38. See Baffi (1978; p. 399).

  39. See Baffi (1978; p. 398).

  40. See Baffi (1976a; p. 211).

  41. See Baffi (1975).

  42. See Giannini (2004).

  43. See Guarino (2004) and Ciocca (2008).

  44. Toniolo (2003) qrote: “The war, therefore, led to two important and characteristic factors of Italian central banking and its relative independence: the high capacity to offer technical skills … and the strong influence exerted on the technical choices of the government”.

  45. See Pittaluga (2004).

  46. See Baffi (1977a; p. 1006).

  47. See Baffi (1977b, p. 213).

  48. See Pittaluga and Cama (2004).

  49. See Baffi (1976a; p. 212).

  50. See Rogoff (1985), Barro and Gordon (1983), Walsh (1995), Persson and Tabellini (1993).

  51. See Pittaluga and Cama (2004).

  52. See Jensen (1997).

  53. See Baffi (1976a; p. 212).

  54. Bresciani-Turroni (1931; p. 454).

  55. See Bank of Italy (1947, p. 108).

  56. See Baffi (1974).

  57. See Sarcinelli (1999).

  58. See Baffi (1990; p. 112).

  59. See Pittaluga and Seghezza (2012).

  60. It is no wonder that Baffi (1974; p. 165), referring to the redistribution of wealth due to inflation, concluded with reference to 1973 that “under current conditions inflation is a mechanism to transfer purchasing power of importance comparable to that of the tax mechanism” [Trad.].

  61. See Bank of Italy (1980).

  62. See Baffi (1976b).

  63. See Baffi (1981).

  64. See Baffi (1973; p. 164).

  65. “Inflation is the process by which the sum of the demands by the social classes on the national product is traced back to the dimensions of the latter. It makes the system of distributive aspiration compatible with the real flow of resources. The more individual or groups are able to defend themselves through the sliding wage scale and the monetary protection clauses from the negative effect of inflation on their purchasing power, the narrower the area on which the erosion of purchasing power must be applied, and, ceteris paribus, the greater will be the rate of inflation”. (Baffi 1974; p. 163 [trad.]).

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  1. Dipartimento di Scienze Politiche, Università di Genova, Piazzale Brignole 3, 16125, Genova, Italy

    Elena Seghezza

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Seghezza, E. Governor Baffi’s View on the Italian Great Inflation. Ital Econ J 6, 563–584 (2020). https://doi.org/10.1007/s40797-019-00107-x

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