The politics of monetary policy in France, Italy, and Germany, 1973-1985

This dissertation examines the process of monetary policy-making in three medium-sized industrial countries--France, Italy, and Germany--from 1973 to 1985. In particular, it compares the ways in which each country responded to the conflict between domestic political pressures and international economic constraints.; For France, Italy, and Germany, this conflict between sovereignty and interdependence has been particularly salient. These medium-sized countries are not so large that they are able to ignore international economic pressures, nor so small that they must forswear national autonomy. In the early years after the breakdown of the Bretton Woods system of fixed exchange rates in 1973, France, Germany, and Italy all behaved as if they faced no external constraints, and their monetary policies sharply diverged. German monetary policy became very restrictive. French and Italian monetary policy, on the other hand, were set on an expansionary course. By the early 1980's, however, the central banks of all three countries were all practicing restrictive policies.; The central argument of this dissertation is that the impact of institutions, coupled with increasing international financial integration, are the crucial determinants of this pattern of policy. Monetary divergence in the early 1970s resulted from the differing impact of domestic political factors--trade union power, the timing of elections, and the party in control of government--on monetary policy in the three countries. This impact, however, was itself determined by the institutional framework of monetary policymaking--notably, the degree of central bank independence. Dependent central banks in France and (until 1981) in Italy, enabled domestic political pressures to influence the monetary policymaking process. The outcome was a relatively expansionary monetary policy. The independent status of the German Bundesbank, on the other hand, dampened the effect of those variables and permitted a more restrictive policy.; As financial integration increased in the course of the 1970s and early 1980s, it became more and more costly for countries to pursue monetary policies that diverged from the world trend. Recognition of this external constraint led to the creation of the European Monetary System (EMS) in 1979, which amplified the political costs of policy divergence, especially for weaker currency countries. As a result, the monetary policies of the three countries have progressively converged towards a more restrictive course.