The Phillips Curve and the Italian Lira, 1861-1998

We examine Italian inflation rates and the Phillips curve with a very long-run perspective, one that covers the entire existence of the Italian lira from political unification (1861) to Italy’s entry in the European Monetary Union (end of 1998). We first study the volatility, persistence and stationarity of the Italian inflation rate over the long run and across various exchange-rate regimes that have shaped Italian monetary history. Next,weestimate alternative Phillips equations and investigate whether nonlinearities, asymmetries and structural changes characterize the inflation-output trade-off in the long run. We capture the effects of structural changes and asymmetries on the estimated parameters of the inflation-output trade-off, relying partly on sub-sample estimates and partly on time-varying parameters estimated via the Kalman filter. Finally, we investigate causal relationships between inflation rates and output and extend the analysis to include the US and the UK for comparison purposes. The inference is that Italy has experienced a conventional inflation-output trade-off only during times of low inflation and stable aggregate supply.