تجارت کردن نوسانات تورم خروجی: یک مورد جایی که سیاست های پولی ضد تورم تبدیل به موفقیت می شوند، یک ارزیابی تاریخی

Over the period 1988–2000, the Greek monetary authorities seemed to have implemented a successful disinflation policy. The question, however, is whether this disinflation was optimal or not. This paper, through a theoretical model and the GMM approach, constructs an optimal policy frontier in terms of a trade-off between output and inflation variabilities. The frontier yields increases in the output variance when policymakers attempt to decrease inflation variances, and vice versa. The location of the actual monetary policy performance suggests a policy close to the frontier, implying a successful monetary policy.

It has been evident that certain central banks have set dual targets of minimising inflation and maximising employment, while for others a low inflation has been their sole target. The main objection to a sole inflation target is that it ignores the consequences of interest rate changes for output and unemployment. This difference embodies the philosophy that there is not any long-run output–inflation trade-off. Nevertheless, such a trade-off could exist in the short-run. In other words, the public refuses to accept that the central bank has the capacity to permanently affect economic activity (real income and unemployment) through monetary policy actions. However, the absence of a long-run trade-off between output and inflation does not provide any argument that monetary policy is totally unnecessary. There is an interesting debate about how the monetary authorities target inflation. If they try to keep inflation close to a target, then there will be a substantial increase in output and interest rates volatility. More specifically, if the output–inflation trade-off is convex then a lower level of output is associated with higher output volatility — since booms associated with accelerating inflation must be matched by bigger recessions to eliminate the extra inflation from the economy — which in turn tends to have adverse effects on investment and growth (Andres, Domenech, & Molinas, 1996). The presence of a short-run trade-off between the levels of output and inflation implies the presence of a long-run trade-off between the variances of output and inflation (Fuhrer, 1997 and Taylor, 1994). It is known that the monetary authorities find extremely difficult to simultaneously satisfy both their output and inflation targets. This difficulty arises from the fact that monetary policy is subject to various time control lags as well as to the fact that the economy is continuously subject to various supply and demand shocks. The best solution for the monetary authorities is to decide how fast they can correct any divergence of inflation from its target. In particular, they have two choices: first, to eliminate that divergence quickly and thus to achieve a low variance of inflation around its target as low as possible at the expense of a higher output variability (around its natural rate); alternatively, if they decide to maintain a low output volatility, they have to accept a higher inflation variability (around its target). In other words, the primary concern of the monetary authorities is not to reach optimal decisions through a trade-off between the levels of output and inflation, but between the volatilities of the two relevant variables around their targets. Such a policy menu represents the presence of an optimal policy frontier given certain relative weighting of these two goals (Ball, 1997 and Bean, 1998). Policy is expected to be efficient only if the combination is being on the frontier. At the same time, an inflation target is still consistent with the selection of other points on the frontier. This could occur only if the inflation target is flexible; flexibility of inflation means that once the level of inflation diverges from its target, the monetary authorities do not act quickly to eliminate that divergence but they do it gradually in order to avoid any sharp fluctuations in output. The goal of this paper is to investigate whether the institutional environment in Greece was conducive to choosing the right speed at which to return inflation to target. The answer is crucial since different speeds of adjustment have corresponding effects on output volatility and, thus, on growth. The legislation for the Bank of Greece (the central bank) mentioned, particularly after 1988, that low inflation was the primary goal of economic policy. The persistence to the inflation target emanated from the fact that the country had to satisfy the inflation criterion, set by the Maastricht Treaty, to fully participate to the eurozone countries by the year 2001. Over the period 1988–2001, the inflation rate stayed reasonably close to its target. While during the 1980s, the inflation rate reached a level well above 20%, this rate dropped to 2.4% at the end of 2000, while the unemployment rate followed a rising route over the same period, reaching a ‘terrifying’ measure of 11.2%. Over the period 1988–2000, the monetary authorities seemed to have implemented a successful disinflation policy. The question, however, is whether this disinflation was optimal or not. That is why this paper will construct an optimal policy frontier for the Greek economy in terms of an efficient long-run trade-off between output and inflation variability. The main contribution of the paper is that for the first time an optimal policy frontier will be employed to assess the optimality or not of the Greek monetary authorities activities to lower inflation. This assessment seems ready to provide substantial suggestions about the optimality of monetary policy with regard to the primary goals of inflation and unemployment, considering that 3 years after the official acceptance of the country by the eurozone countries, the economy has been capable of meeting only the primary goal of reducing inflation. In fact, economic policies seem incapable of substantially reducing unemployment below 9–10%. This phenomenon could be an indication that the implementation of the monetary policy should have been combined with certain structural measures that could have made labour and goods markets more deregulated. In fact, from 1980 and onwards, the Greek economy has been characterised by stagnation conditions due to the absence of investments and a rising trend in unemployment figures. In 1980, percentage unemployment was virtually 2.8%. Unemployment in Greece is on the rise recently and stood at the end of 2002 at 10.1%. The most painful characteristic of unemployment in Greece is that it is mostly characterised as long-term unemployment. Today, over 50% of unemployed can be characterised as long-term unemployed. Meghir, Ioannides, and Pissarides (1989) provided empirical support to the prolonged duration of unemployment in Greece. For them education and technical qualifications contributed to the increase of the duration of unemployment, while family support, through high reservation wages, seems to be another factor. Elmeskov and MacFarlan (1993) and Apergis (2002) have also provided evidence in favour of such persistence phenomena in the Greek economy that can be explained through hysteretic effects. Section 2 of the paper reports a simple model in which monetary policy has real effects, while Section 3 focuses on the empirical analysis and discusses the empirical results. Finally, Section 4 concludes the paper.

This study employed a model of monetary policy in which the central bank minimises a discounted, multi-period loss function that included deviations of inflation and output from their associated targets, while the minimisation process was constrained by an output process. First, inflation and output-gap decision rules were derived through which their associated variance estimates were obtained for the Greek economy over the period 1988–2000. Next, an optimal policy frontier, i.e., an efficient weighted trade-off, underlying the relationship between these two variances, was constructed. The frontier yielded increases in the output-gap variance when policymakers attempted to decrease inflation variances, and vice versa. Furthermore, the location of the actual monetary policy performance over the period under investigation suggested a policy close to the frontier, indicating the implementation of a successful anti-inflation policy. The derived results provide substantial suggestions about the optimality of monetary policy relatively to the primary goals of inflation and unemployment. As a matter of fact, 3 years after the official acceptance of the country by the eurozone countries, the economy has been capable of meeting only the primary goal of reducing inflation. The economic authorities seem unable to reduce unemployment below 9–10%. This phenomenon could be an indication that the implementation of the monetary policy is not sufficient to be dealing with the real sector and that form of economic policy should have been combined with certain structural measures that could have made labour and goods markets more deregulated. In other words, in order for disinflation policies to be optimal they must be accompanied by microeconomic policy reforms, i.e., policies directed at improving the regional and occupational mobility of the unemployed, softening of employment legislation, and re-enfranchising the unemployed, in particular, the long-term unemployed. However, only recently, i.e., last year, such reforms have been officially institutionalised in the Greek labour market through legislation that has been approved by the Greek parliament.