A dissonant violin in the international orchestra? Discount rate policy in Italy (1894-1913)

This paper investigates the discount rate policy implemented by the main Italian bank of issue of the time, the Banca d’Italia, from its establishment until the eve of World War I. Using a new series of the relevant discount rate, we focus on two interrelated issues. First, anchoring our analysis to the Bank’s annual reports, we enquire into the general determinants of discount rate variations. Second, we study the reaction of the Italian rate to exogenous changes in leading international official rates. We show that discount rate variations responded to short-term fluctuations of the British and French official rates and also to deviations from long-term equilibrium relations involving two pairs of variables: (i) the Italian discount rate and the French open market rate; (ii) the Bank’s reserve ratio and its domestic portfolio. No reaction is detected to the exchange rate. We also show that responses to variations in foreign official rates were of a very limited magnitude. This “sterilisation” policy came with little repercussions in terms of exchange rate fluctuations or loss of international reserves.