An Analysis of the Process of Capital Liberalization in Italy

IMF Working Papers, April 1, 1992

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Beginning in 1985 Italy embarked on a path of progressive removal of its system of controls on portfolio investment, a process formally completed with the abolition of all remaining restrictions in 1990.
The paper reviews the policy of capital liberalization and integrates the analysis with an examination of the process of stabilization of the lira exchange rate in the 1980s.
Subject coverage: Balance of payments, Capital controls, Capital flows, Capital inflows, Exchange rate stability, Exchange rates, Foreign exchange.

The study uses various indicators of capital controls’ effectiveness and target zone credibility.
The indicators are employed to identify the temporal relations among:
- capital liberalization,
- exchange rate stabilization,
- capital flows.

Capital liberalization in Italy proceeded progressively from 1985 and was formally completed in 1990 with the abolition of all remaining restrictions on portfolio investment.
The analysis integrates the timeline and dynamics of capital liberalization with the stabilization process of the lira exchange rate during the 1980s.
Temporal relations among capital liberalization, exchange rate stabilization, and capital flows are identified using the selected indicators of controls’ effectiveness and target zone credibility.