The predictability of monetary policy has helped reduce the volatility of the financial markets. At the launch of the monetary union there were fears that certain structural features would make the Italian economy more vulnerable than others to variations in the official rates. Monetary policy produces its effects on the economy above all by influencing the cost differential between firms’ external and internal finance.
Its impact is therefore amplified by information asymmetry concerning the state of the borrower, or by the impossibility for firms of replacing bank loans with market instruments such as bond issues. A situation that is especially common in Italy, where small firms depending on bank credit are prevalent and where private capital markets are still less highly developed than in other large industrial countries.