Was the Euro good for Greece?

Abstract

Taylor (1979) posits a permanent trade-off between the volatility of output gap and the volatility of inflation. This trade-off serves as an efficiency envelope for optimal monetary policy. Using data from 1960, we examine the efficiency of monetary policy in Greece by measuring the orthogonal distance between the observed volatilities of the output gap and inflation from their optimal levels. As expected in an optimal currency area, we find that the Maastricht convergence criteria greatly benefited Greece in improving macroeconomic stability but at the cost of monetary policy efficacy.

Keywords:

• monetary theory
• Greece
• ECB
• optimal control

JEL Classification:

• E31
• E58
• C32

Notes

¹ We would like to thank an anonymous referee for making this point.