Front Matter Page
European Department
Contents
I. Introduction
II. The Current Account in the Context of the Overall Balance
1. The accounting framework
2. The Italian balance of payments, 1960-88
a. The 1963-64 crisis
b. The first oil shock
c. The second oil shock
d. The crisis of 1985-86
III. The Current Account in the Context of the Saving-Investment Balance
1. Overall trends, 1970-88
2. Major episodes of external imbalance, 1970-88
a. The first oil shock
b. The second oil shock
c. The 1985-86 crisis
IV. Lessons from Italy’s Balance of Payments Experience
1. The importance of capital and reserve flows
2. Implications for exchange rate policy
3. The interpretation of saving-investment correlations
4. Implications for saving-investment criteria of sustainability
Tables
1. External Account Indicators, 1960-88
2. Real GDP, Domestic Demand and Aggregate Demand, 1971-88
3. The Current Account and Saving-Investment Balances, 1970-88
4. Saving-Investment Correlations and the Current Account, 1970-88
Charts
1. Current and Overall Payments Balances, 1960-88
2. Saving-Investment. Balances, 1970-88
3. Composition of Private and Public Sector Balances, 1970-88
4. The Current Account and Investment in Inventories, 1970-88
References
Summary
This paper examines Italy’s balance of payments history since 1960 to draw some lessons for policies regarding the current account. It analyzes the current account from two alternative perspectives. The first is a balance of payments accounting framework that helps highlight the financial implications of current imbalances. The second is a national accounts framework, which is the basis of the increasingly popular saving-investment approach.
Viewing Italy’s current account in the context of the overall balance of payments brings out the important interactions among current imbalances, speculative capital flows, and official reserve movements. Widening current account deficits have in the past tended to trigger speculation against the lira, leading to large losses of official reserves. To stem these losses, the Italian authorities had to implement strong adjustment measures, thereby leading to prompt correction of the deficit. This quasi-automatic adjustment mechanism explains why the current account averaged near balance over the 1960-88 period, despite the manifest mobility of capital over shorter time spans.
Examining the current account in the context of the saving-investment balance shows that widening fiscal deficits are neither necessary nor sufficient conditions for external disequilibrium. Despite Italy’s large and persistent fiscal deficit--averaging 9 1/2 percent of GDP over the 1970-88 period--its external current account remained near balance on average, reflecting the offsetting effects of a large positive private sector balance. The fiscal deficit, moreover, could not account for Italy’s balance of payments crises since 1970. Fluctuations of the private balance, largely on account of changes in inventory investment, explain most of the ups and downs of the current account deficit during the mid-1970s and early 1980s. Only in 1985-86 is there evidence of a significant fiscal contribution to the deterioration of the current account, but this is attributable to higher public investment rather than to lower public saving.
The role of capital and reserve flows helps place the current account in perspective as only one of the determinants of external stability. An exchange rate rule geared solely toward balancing the current account could generate expectations that destabilize the capital account. A firm exchange rate policy could be more conducive to the orderly financing of the current account, provided that it is backed by adequate financial resources. The Italian experience also suggests that simple saving-investment policy rules cannot always avert balance of payments crises and that cross-country saving-investment correlations are unreliable gauges of the degree of capital mobility.