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The paper examines the 1947 monetary stabilization in Italy, tracing the domestic and international political dynamics that allowed ideas and theoretical concepts developed within the Bank of Italy to be applied in a successful action to subdue spiraling inflation. The combination of events and circumstances necessary for the good outcome in a critical juncture of Italian economic history was the fruit of the efforts made by Prime Minister Alcide De Gasperi in both the domestic and international political arenas and of the collaboration he received from Luigi Einaudi and Donato Menichella. The Government’s economic action in this crucial episode constitutes perhaps the first outstanding example of cooperation between politicians and experts in the annals of the Italian Republic.

This paper analyzes the stability of foreign trade, currency markets and international portfolio balances with the help of a model which captures the interactions between current account balances and the international asset portfolios for domestic and foreign investors. The model is used for policy analysis based on numerical simu-lations for the interplay between the US and China in terms of exchange rate, foreign exchange reserves and foreign debt. Conditions for the existence of dynamic equili-bria, and whether they can be attained, are derived under alternative policy assumptions. Simulations of the model show that "trade space" (the range of trade and foreign liability imbalances that can be absorbed without triggering an unstable sequence of adjustments) is sensitive to the policy regimes in place; and to the preferences of investors and particular strategies employed by policymakers within those regimes. Our benchmark scenario, representing today's conditions for the US and China, shows trade space is comfortably larger than the adjustments usually said to be necessary. That would be satisfactory if we start from equilibrium. Unfortu-nately, we do not. But the result does suggest that currency peace rather than currency war is likely to be a more productive strategy for reducing existing imbalances. [ABSTRACT FROM AUTHOR]