اثرات کاهنده تورم دائمی در بیکاری در یک اقتصاد کوچک باز : ایتالیا 1979-1995

The aim of this paper is to investigate the effects on the rate of unemployment of the disinflationary policies and other aggregate demand shocks which affected the Italian economy during the period 1979–1995. To this end, a structural cointegrated VAR model is built and the structural disturbances are recovered by imposing a set of short-run, contemporary restrictions. The results show that both short-run and long-run movements in unemployment are influenced by disturbances to aggregate demand, as well as by supply shocks. This evidence seems to be at odds with the predictions of “natural-rate” theories.

This paper shows that disinflationary policies and other adverse shocks to aggregate demand caused a permanent increase in Italian unemployment in the 1980s and early 1990s. These results are at odds with the prediction of “natural rate” theories, according to which tight monetary policies provoke only a rise in cyclical unemployment, since the long-run equilibrium unemployment is independent of monetary policy and aggregate demand. The picture which emerges from this paper is different: both short-run and long-run movements in unemployment are influenced by monetary policy and other shocks to aggregate demand, as well as by shocks on the supply side. These results support hysteresis theories (cf. Blanchard and Summers, 1986). In fact, a central prediction of these models is that a disinflationary process causes a rise in cyclical unemployment and this provokes a rise in the long-run trend, the so-called non-accelerating inflation rate of unemployment (NAIRU). It is worth stressing that the possible presence of persistent aggregate demand shocks could also be accommodated within a conventional model with long-run monetary neutrality. After all, a building block of “natural rate” models rests on the idea that negative shocks on the demand side, in particular those originating from monetary policy tightening, might cause a temporary increase of unemployment in the presence of errors in expectations. Thus, persistent shocks on the demand side are compatible with a vertical long-run Phillips curve. Nevertheless, in this paper we find that, as far as the selected period in the Italian economy is concerned, the existence of a negative long-run equilibrium relation between inflation and unemployment cannot be rejected and hence a long-run non-vertical Phillips curve seems to characterize the Italian economy in the sample period considered. It is important to point out that in 1979, the starting year of our investigation, the world economy was affected by three major events: (1) the Iranian revolution and the connected second oil shock which caused an increase both in unemployment and inflation in the industrialized countries; (2) Italy and some other European countries joined the fixed exchange rate mechanism of the European Monetary System (EMS); (3) The reaction of main central Banks to inflation consisted in a sharp increase of short-term interest rates. Hence, in 1979 we observe both a peak in inflation and the beginning of the disinflation era. In the early 1980s, as a consequence of disinflationary monetary policies, Italy and most OECD countries experienced recessions and the rate of unemployment rose to levels unknown since the Great Depression. Moreover, in Italy, as in other European countries, the increase in unemployment turned out to be strongly persistent. Furthermore, in the early 1990s, there was a new episode of tightening monetary conditions in Italy since exchange rate goals and anti-inflation policy induced another sharp increase in short-term interest rates. The recession of 1992–1993 followed and in the period 1991–1995 the rate of unemployment rose three percentage points to 12%. In two recent papers Ball, 1997 and Ball, 1999 criticizes the prevailing explanation of the rise in European unemployment in the 1980s, founded on imperfections in the labor market. Such imperfections induced by a set of rules, regulations and labor market institutions, would make the labor market too inflexible. Ball argues that this “conventional wisdom” fails to consider the role of monetary policy and aggregate demand in the rise of long-run unemployment. In this paper we try to address the questions raised by Ball and other authors by investigating the interactions among inflation, unemployment and monetary policy that characterize the Italian economy. To this end, a simple structural cointegrated VAR model, with quarterly data spanning the period 1979–1995, is built. We recover the structural shocks by imposing a set of identifying restrictions which aim to capture some features of a small open economy like Italy. Moreover, we avoid neutrality restrictions capable of obscuring potential permanent effects on unemployment of aggregate demand shocks and monetary policy intervention. A widely held view maintains that in the 1980s and early 1990s, Germany, the country that was the anchor of the EMS, was the ‘conductor of the European orchestra’,1 and hence identifying the monetary policy rule for a small open economy like Italy necessarily requires the consideration of German variables. In line with the recent literature on monetary policy rules (e.g. Taylor, 1999) it is assumed that the central bank uses a short-term interest rate as its instrument. In a first stage we identify the long-run relationships which are suggested by cointegration analysis and theoretical arguments. The first important conclusion is that the Italian economy is characterized by a long-run tradeoff between inflation and unemployment. In a second stage we investigate the dynamic effects at different horizons on inflation and unemployment of three different kinds of structural disturbances: monetary policy shocks, demand shocks and supply shocks. Since we want to detect the potential presence of long-run effects of monetary policy and other demand shocks on unemployment, we do not impose a-priori low frequency restrictions, and identification is achieved by imposing a set of contemporaneous, short-run restrictions on the cointegrated VAR. The second interesting conclusion we draw from the innovations accounting, is that although an important role is played by supply shocks, movements in the rate of unemployment, both at the business cycle frequencies and in the long run, are explained by all the three shocks. The paper is organized as follows: Section 2 outlines the strategy followed in order to achieve the identification of the structural disturbances; Section 3 proceeds to the estimation of the empirical model, selection of the cointegration rank and identification of the long-run relations; in Section 4 we recover the structural parameters by imposing a set of contemporary restrictions on the estimated vector error-correction model and show the dynamic response of inflation and unemployment to structural disturbances. In the final part of the section we present a forecast-error variance decomposition in order to investigate the relative importance of the three shocks in composing the variability of the unemployment rate at different horizons; Section 5 concludes.

The rate of unemployment rose in most OECD countries in the 1980s. As stressed by Ball (1997), countries which experienced larger decrease in inflation and longer disinflationary periods had larger increases in unemployment. Ball argues that the central cause of this rise in unemployment was the tight monetary policy undertaken in most OECD countries in order to reduce inflation. In this paper we have investigated the nexus between inflation and unemployment in the context of the Italian economy during the period 1979–1995, i.e. a period of prolonged disinflation. The task was accomplished by estimating a cointegrated VAR model on which a set of overidentifying contemporary restrictions was imposed. In particular, a monetary policy shock has been identified on the assumption that the central bank throughout this period was mainly concerned with control of the inflation rate and, more important, had to take into account the decisions of the German central bank regarding the short-term interest rate. In effect, we have tried to incorporate in the structural model the idea that for a small open economy it is not possible to conduct an independent monetary policy — at least, not completely independent. Our findings can be summarized as follows. It is not possible to reject the hypothesis of a long-run tradeoff between inflation and unemployment. Moreover, aggregate demand shocks and monetary policy shocks exert effects on the rate of unemployment both in the short and the long run. As for supply shocks, such as change in productivity or in labor force, they also play an important and indeed preeminent role in explaining movements in unemployment and inflation at all frequencies. These results do not support ‘natural-rate’ based models for the Italian economy but seem consistent, at least partially consistent, with a hysteretical interpretation of unemployment dynamics. The specific channels through which demand shocks have propagated very persistent effects on the real variables were not investigated in this paper and should be an objective for a future extension of this research. Finally, it would be tempting to assert that expansionary aggregate demand policies could permanently reduce the rate of unemployment and indeed this is an implication of our results. Nevertheless, we believe that this conclusion is to be taken cum grano salis. For, there is at the moment no convincing proof that hysteresis also works in the opposite direction and it is our conviction that the results obtained with linear structural models need to be corroborated by further evidence. Furthermore, we emphasize that aggregate demand policies should not (and cannot) be undertaken at single country level. On the other side, looking at the Euro area, we should pay closer attention to the experience of the US economy in the 1980s, when the strong recovery which followed the 1982 recession was magnified by loosening monetary policy and increasing public spending.