Capital inflows, current accounts and the investment cycle in Italy

Relying on a new dataset, this paper examines the genesis of current account fluctuations and the investment cycle in Italy. We perform a Granger causality test that shows that the persistent current account deficits in the years from unification to World War I were generated by variations in capital inflows, as hypothesized by Fenoaltea, and not by the dynamics of GDP, as in the Bonelli-Cafagna model. Finally, we show that these capital inflows prompted an industrial investment cycle in equipment and machinery but not - as claimed by Fenoaltea (1988) - a general investment cycle which included also construction and more volatile components of investment. These patterns held under both fixed and floating exchange rate regimes.