Recent Greek Monetary Policies

Abstract

Having reviewed in the previous chapterlhe main monetary developments in Greece, we are now ready to attempt an evaluation of Greek monetary policies after 1975. Following the introduction of monetary targets in Germany in December 1974 and in the United Kingdom in 1976, Greece adopted monetary targeting in 1976 and this policy regime lasted until 1988. With a few exceptions, all monetary targets set during this period were missed. Here, an evaluation of the monetary targeting policy regime in Greece will be attempted. It is argued that for monetary targets to be an effective policy, a constant (or sufficiently predictable) velocity of circulation and no money financing of government deficits have to be assumed. We draw special attention to a structural feature of the Greek monetary system, the direct financing of the government’s deficit from the central bank (a policy that has been effectively banned since 1st January 1994 in accordance with the Maastricht Treaty provisos). This money financing was the main cause of the constant overshooting of monetary targets that resulted in the high inflation rates experienced in Greece throughout this period. Next, an evaluation of the current policy regime will follow, namely, that of nominal exchange rate targeting. The experience from other countries has shown that for a small open economy, exchange rate targeting is quite an effective policy for bringing inflation down (mainly through its effect on imported inflation), but only in the short term. In the long term, such a policy might have serious effects upon the current account of the country. In Greece, there is little disagreement among economists and policy-makers that the strong drachma policy has been successful in bringing down the inflation rate to 6% in 1997. However, this has been achieved at the expense of higher and higher external imbalances during the years that this policy has been implemented. Moreover, what is the cause for further concern is that despite the recent welcome drop in Greek inflation, the latter still remains three times higher than the European average inflation rate.