Ricerc@Sapienza

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.

The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework.