Monetarism, budget deficits, and wage push inflation: the cases of Italy and the U.K.

Abstract

The present paper discusses two of the major areas of current disagreement between monetarists and anti-monetarists. The first concerns inflation-unemployment relationships and the distinction between demand-pull and cost-push pressures. The second concerns the underlying causes of inflationary pressures. After considering both of these issues, the impact of four major variables on monetary expansion in Italy and the United Kingdom are investigated. While strongly agreeing with the monetarists that autonomous cost-push pressures cannot cause high rates of inflation without monetary validation, the authors present evidence that suggests that cost-push factors as well as budget deficits have been major contributors to the high rates of monetary expansion in both Italy and the United Kingdom. Moreover, international factors do not appear to have had a strong systemic influence.

JEL: E31, E24, E50