International financial flows, domestic banks, and the economic development of the periphery:Italy, 1861-1913

This paper analyses the impact of different sources of financing (foreign capital, migrants’
remittances, and domestic banks intermediation) on economic development in Italy between 1861
and WWI. Existing literature has analysed the role of these channels of financial intermediation
separately, while this paper for the first time considers them in conjunction. Using IRF from a
Cholesky identification structure of a VAR model and relying on an original dataset that combines
the most recent series of several financial and economic aggregates, this paper shows that both
international capital and domestic saving had a significant impact on investment, while remittances
did not. Foreign capital was invested directly, but also via domestic banks, in particular the
“German-style” universal banks. Finally, foreign and domestic capital had different attitudes
towards the types of investment (construction vs. plant, machinery and transport equipment) and
industries they financed. Combined together, these results shed a new light on the process of
economic development of Italy and, more generally, of peripheral economies in the age of the
international gold standard.