Abstract
We model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by German/ECB interest rates, though still influenced by domestic fundamentals; (ii) involving non-linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reduction in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Alogoskoufis G (1995) The two faces of Janus: institutions, policy regimes and macroeconomic performance in Greece. Econ Policy 20: 149–192
Arghyrou MG, Bazina E (2003) Competitiveness and the external trade of Greece in the 1990s: a cross-sectoral investigation. J Econ Integr 18: 763–793
Arghyrou MG, Martin C, Milas C (2005) Non-linear inflationary dynamics: evidence from the UK. Oxford Econ Pap 57: 51–69
Arghyrou MG, Boinet V, Martin C (2006) Non-linear and non-symmetric exchange-rate adjustment: evidence from medium- and high-inflation economies. J Econ Finance 30: 38–56
Ball L (1999) Efficient rules for monetary policy. Int Finance 1: 63–83
Bayoumi T, Eichengreen B (1997) Ever close to heaven: an optimum currency area index for European countries. Eur Econ Rev 41: 761–770
Bec F, Salem MB, Collard F (2002) Asymmetries in monetary policy reaction function: evidence for U.S., French and German central banks. Studies in Nonlinear Dynamics and Econometrics, vol 6: No. 2, Article 3. Available via Berkeley Electronic Press. http://www.bepress.com/snde/vol6/iss2/art3
Chalikias D (1996) The road towards European Monetary Union, Institute of Economic and Industrial Research (IOBE), Athens (in Greek)
Clarida R, Gali J, Gertler M (1998) Monetary policy rules in practice: some international evidence. Eur Econ Rev 42: 1033–1077
Clausen V, Hayo B (2005) Monetary policy in the euro area—lessons from the first years. Int Econ Econ Policy 1: 349–364
Domenech R, Ledo M, Taguas D (2002) Some new results on interest rate rules in EMU and in the US. J Money Credit Bank 35: 545–556
Ehrmann M, Smets F (2003) Uncertain potential output: implications for monetary policy. J Econ Dyn Control 27: 1611–1138
Engel J, Haugh D, Pagan A (2005) Some methods for assessing the need for non-linear models in business cycle analysis. Int J Forecast 21: 651–662
Escribano A, Granger CWJ (1998) Investigating the relationship between gold and silver prices. J Forecast 17: 81–107
Faust J, Rogers JH, Wright JH (2001) An empirical comparison of Bundesbank and ECB monetary policy rules. Board of Governors of the Federal Reserve System, International Finance Discussion Papers No. 705
Filippides A, Kyriakopoulos P, Moschos D (1995) Monetary policy instruments used by the Bank of Greece. Bank Greece Econ Bull 6: 63–72
Gerlach S, Schnabel G (2000) The Taylor rule and interest rates in the EMU area. Econ Lett 67: 165–171
Gerdesmeier D, Roffia B (2003) Empirical estimates of reaction functions for the Euro area. European Central Bank, Working Paper No 206
Giavazzi F, Spaventa L (1990) The “new” EMS. Centre for Economic Policy Research, Discussion Paper No 369
Granger CWJ, Lee TH (1989) Investigation of production, sales and inventory relationships using multicointegration and non-symmetric error correction models. J Appl Econ 4: S145–S159
Granger CWJ, Teräsvirta T (1993) Modelling non-linear economic relationships. Oxford University Press, Oxford
Hayo B, Hofmann B (2006) Comparing monetary policy reaction functions: ECB versus Bundesbank. Empir Econ 31: 654–662
Hendry DF, Doornik JA (2001) Empirical econometric modelling using PcGive, vol I. Timberlake, London
Hodrick RJ, Prescott EC (1997) Post-war U.S. business cycles: an empirical investigation. J Money Credit Bank 29: 1–16
Inder B (1993) Estimating long-run relationships in economics: a comparison of different approaches. J Econ 57: 53–68
Luukkonen R, Saikkonen P, Teräsvirta T (1988) Testing linearity against smooth transition autoregressive models. Biometrika 75: 491–499
Martin C, Milas C (2004) Modelling monetary policy: inflation targeting in practice. Economica 71: 209–221
Mihov I (2001) Monetary policy implementation and transmission in the European Monetary Union. Econ Policy 16: 369–406
Mundell RA (1961) A theory of optimal currency areas. Am Econ Rev 51: 657–665
Mourmouras IA, Arghyrou MG (2000) Monetary policy at the European periphery: Greek Experience and lessons for EU candidates. Book in the European and Transatlantic Studies Series. Springer, Berlin
Obstfeld M (1996) Models of currency crises with self-fulfilling features. Eur Econ Rev 40: 1037–1047
Orphanides A, Wieland V (2000) Inflation zone targeting. Eur Econ Rev 44: 1351–1387
Saikkonen P, Luukkonen R (1988) Lagrange multiplier tests for testing non-linearities in time series models. Scand J Stat 15: 55–68
Smets F (2002) Output gap uncertainty: does it matter for the Taylor rule? Emp Econ 27: 113–129
Surico P (2003) Asymmetric reaction functions for the euro area. Oxford Revi Econ Policy 19: 44–57
Surico P (2007) The monetary policy of the European Central Bank. Scand J Econ 109: 115–135
Svensson L (1997) Inflation forecast targeting: implementing and monitoring inflation targets. Eur Econ Rev 41: 1111–1146
Taylor J (1993) Discretion versus policy rules in practise. Carnegie-Rochester Conf Ser Public Policy 39: 195–214
Taylor MP, Sarno L (2001) Real exchange rate dynamics in transition economies: a non-linear analysis, Studies in Non-Linear Dynamics and Econometrics, vol 5, issue 3, Article 1. Available via Berkeley Electronic Press. http://www.bepress.com/snde/vol5/iss3/art1/
Teräsvirta T (1994) Specification, estimation and evaluation of smooth transition autoregressive models. J Am Stat Assoc 89: 208–218
Teräsvirta T, Anderson HM (1992) Characterizing nonlinearities in business cycles using smooth transition autoregressive models. J Appl Econ 7: S118–S136
Walsh CE (2000) Monetary theory and policy. MIT Press, Cambridge
Van Dijk D, Teräsvirta T, Franses PH (2002) Smooth transition autoregressive models—a survey of recent developments. Econ Rev 21: 1–47
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Arghyrou, M.G. Monetary policy before and after the euro: evidence from Greece. Empir Econ 36, 621–643 (2009). https://doi.org/10.1007/s00181-008-0216-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-008-0216-z