The transmission of monetary policy shocks in Italy

The paper studies the transmission of monetary policy shocks in Italy, by means of a structural VAR, using a long data sample; focusing on a long sample period permits a comparison between the Italian evidence and the international literature and makes it possible to test the robustness of the results in relation to structural and institutional changes. The interest rates on the refinancing operations of the Bank of Italy are used as measures of monetary policy; the identification of policy shocks is based on a reaction function that includes the exchange rate among its arguments. Under these identifying assumptions, the responses of output and prices to a monetary shock are consistent with the main findings in the international literature; however, the size of the estimated price response is large, leading to a divergence from existing structural models of the Italian economy, in which the effects of monetary policy on prices are limited. After a restriction, real wages increase (in contrast, in the US they decrease); the exchange rate appreciates; the fall in import prices precedes the decrease in consumer prices.