ABSTRACT
Membership of the European Monetary System has had many important consequences for Italy's macroeconomic policies. Some have been entirely positive. Others have had more questionable features. The need to achieve exchange rate stability and therefore reduce domestic inflation led to a gradual tightening of monetary policy. But the strategy of tight money with a strong currency that produced disinflation also led to higher interest rates and therefore to rising government outlays and a rising debt-to-GDP ratio, since the discipline exerted by the EMS did not extend to fiscal policy. On the contrary, the 'credibility' of the lira in the ERM promoted a relatively low-cost means of funding of the PSBR, at least until the summer of 1992 when EMS discipline and fiscal imbalance finally came into conflict.
