Inflation and currency devaluation in Italy (1971-1979)

Italy experienced higher and more persistent rates of inflation than other Western economies during the Great Inflation (1971-1979). The policy response in Italy was prompted by the idea that wages were the carrier of inflation, and that the devaluation of the Lira was the only viable response to sustain firms’ profit rates and aggregate demand. We discuss the relevance of this policy approach and conclude, against the prevalent view, that the devaluation worsened the inflation spiral while wages played only a marginal role.