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.