Luigi Federico Signorini: Money, credit and disinflation

Speech by Mr Luigi Federico Signorini, Senior Deputy Governor of the Bank of Italy, at the Vienna University of Economics and Business, Vienna, 24 January 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Let me first thank the Wirtschaftsuniversität Wien, and Professor Aurel Schubert personally, for their kind invitation.

After a long period of low inflation and very accommodative monetary policy, the past few years have seen a sharp increase in price dynamics, followed by a commensurate monetary policy response and then a rapid decline in inflation. This talk will informally discuss some evidence concerning the mechanisms at work, with a focus on monetary aggregates and credit during the inflation and disinflation stages, also in the light of some renewed academic and policy interest in this specific issue.

Major changes in the economic environment often spark intense debate, sometimes reviving ideas that were held to be important for a time, but then fell out of favour. One example of this is the quantitative theory of money, popularised by Milton Friedman more than 60 years ago. During a talk in India in the same year that Friedman's and Anna Schwartz's seminal Monetary History of the United States was published, he famously stated: 'Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output'.

Nowadays few would subscribe to a literal, causal interpretation of Friedman's statement. Too many conceptual and technical issues about causation, and too many 'long and variable lags', as Friedman himself would say. Purely quantity-based monetary policies no longer appear reasonable to many economists. Still, I find it rather remarkable that, after the Volcker and the Bundesbank disinflations of the late 1970s (which, intellectually speaking, owed much to quantity theory), the pendulum eventually swung all the way to the opposite side, and the idea of any relationship between money and prices that was relevant for monetary policy was gradually forgotten.3 After all, inflation by definition only exists in relation to money, and PY=MV is an identity; while V is everything but 'extremely stable', as Friedman would have it, it seems difficult to believe that there is no technological and/or behavioural internal logic to it that will reassert itself sooner or later.