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Monetary policy before and after the euro: Evidence from Greece

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 current ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by foreign (German/ECB) interest rates though still influenced, to some degree, 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.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/26.

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Length: 38 pages
Date of creation: Nov 2006
Date of revision:
Publication status: Published in Empirical Economics , vol. 36, June 2009, 621-643.
Handle: RePEc:cdf:wpaper:2006/26
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Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers

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  1. Domenech, Rafael & Ledo, Mayte & Taguas, David, 2002. "Some new results on interest rate rules in EMU and in the US," Journal of Economics and Business, Elsevier, vol. 54(4), pages 431-446.
  2. Bernd Hayo & Boris Hofmann, 2005. "Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank," Marburg Working Papers on Economics 200502, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Engel, J. & Haugh, D. & Pagan, A., 2005. "Some methods for assessing the need for non-linear models in business cycle analysis," International Journal of Forecasting, Elsevier, vol. 21(4), pages 651-662.
  4. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
  5. Michael Ehrmann and Frank Smets, 2001. "Uncertain Potential Output: Implications for Monetary Policy," Computing in Economics and Finance 2001 8, Society for Computational Economics.
  6. Dieter Gerdesmeier & Barbara Roffia, 2004. "Empirical Estimates of Reaction Functions for the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 37-66, March.
  7. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June.
  8. Paolo Surico, 2007. "The Monetary Policy of the European Central Bank," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 115-135, 03.
  9. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
  10. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
  11. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "An empirical comparison of Bundesbank and ECB monetary policy rules," International Finance Discussion Papers 705, Board of Governors of the Federal Reserve System (U.S.).
  12. Bec Frédérique & Ben Salem Mélika & Collard Fabrice, 2002. "Asymmetries in Monetary Policy Reaction Function: Evidence for U.S. French and German Central Banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(2), pages 1-22, July.
  13. Christopher Martin & Costas Milas, 2004. "Modelling Monetary Policy: Inflation Targeting in Practice," Economica, London School of Economics and Political Science, vol. 71(281), pages 209-221, 05.
  14. Volker Clausen & Bernd Hayo, 2005. "Monetary policy in the Euro area – lessons from the first years," International Economics and Economic Policy, Springer, vol. 1(4), pages 349-364, January.
  15. Michael Arghyrou & Virginie Boinet & Christopher Martin, 2004. "Non-linear and non-symmetric exchange-rate adjustment: new evidence from medium- and high-inflation economies," Money Macro and Finance (MMF) Research Group Conference 2003 2, Money Macro and Finance Research Group.
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