2  BIS Review 31/2007  The transition towards a “monetary constitution” In the summer of 1975, when Baffi succeeded Carli, the Italian economy had fallen into the deepest recession since the war, triggered by the oil shock and by the credit tightening that had been agreed with the International Monetary Fund in order to counter the imbalance in the external accounts, the upsurge of inflation and the depreciation of the lira.
The shock hit Italy at the height of an expansionary cycle, at a time of extreme weakness of economic policy management. Wages, rising at annual rates of more than 20 per cent, had lost any link with productivity. The devaluation-inflation spiral seemed untamable, not least because of the perverse system of indexation.