International movements of bank funds and monetary policy in Italy

Abstract

Since the lira was declared convertible in December 1958, the Italian monetary authorities have been making increasing use of changes in the Italian banks’ foreign position as a policy instrument. The present article analyses in detail how the Italian monetary authorities have used their powers to control banks’ foreign exchange borrowing and lending as a means to restrict or expand domestic liquidity. In general, the flows of bank money to and from abroad have been regulated by the central bank as to make the process of balance-of-payments adjustment more flexible, and hence to attenuate the effects of the liquidity gains and losses due to the surpluses and deficits generated by autonomous operations with abroad. The analysis confirms that when bank credits are used without appropriate measures designed to re-establish basic equilibrium in the balance of payments, they may give rise to speculative capital movements. The author argues that while Italian monetary policy made an effective impact on the course of the economic cycle, it could not control the cycle itself.

JEL: E52, F31, F32