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Has Greek monetary policy been better under the EBC?

March 28, 2012

One of the major justifications given for joining the Eurozone is that the ECB would have more stable monetary policy than the Greek central bank. The Euro was adopted on January 1, 2002, so it has been in effect for one decade. I will compare the level of macroeconomic stability from 1/1/1992 – 1/1/2002 to the period from 1/1/2002 to 1/1/2012 to see if the ECB has done a better job stabilizing NGDP.

Until the beginning of 2008, it appears as if the ECB was highly successful in stabilizing NGDP, after which they pursued highly contractionary policy that persists to today. While some people would probably like to exclude the current crisis from the record, I don’t believe you should simply hand-wave away such a major flaw in the Euro system. The Eurozone as a whole did not have a housing bubble, and their banks initially were not as impacted initially as the U.S. A large part of the blame for the crisis must be laid at the feet of the ECB.

Log of Greek GDP from 1992 to 2002

Log of Greek GDP from 2002 to 2012

The standard deviation of the difference between actual GDP and predicted GDP based on the trend line was 0.073901 for 1992-2002 and .125856 for 2002-2012. The R squared term was 0.6238 for the 1992-2002 period and 0.8671 for the 2002-2012 period. Ideally, if the NGDP trend were perfectly flat, the R squared would be 1, so this suggests a closer to trend performance of the ECB than the Greek Central Bank, even including the financial crisis. The overall range for the second period was much higher, because nominal growth was higher.

Hellenic Statistical Authority Log NGDP 2002 to 2012
2002 to 2012 using Greek Statistics numbers, in Euros, Income Method
I used the numbers from the Income Method.

Using the Hellenic Statistical Authority’snumbers, I get a standard deviation of 0.064426 of the deviation from trend and an R squared of 0.776.

Even with the financial crisis, the ECB has kept Greek nominal GDP closer to trend than the previous policy regime. Combined with the gains from a larger currency union, such as lower transactions costs and lower inflation, I think we can safely say that the ECB has done a better job. The Greeks should probably try to stay on the Euro, even after they default, even tho the ECB has a lot of room for improvement. For comparison, the Fed’s R squared for 2002 to 2012 is 0.9167 and if you include data from 1992, the R squared is 0.9841.

The Fed (for comparison)
U.S. log GDP with trend

Evidence for idiosyncratic shocks?

Hellenic Statistical Authority
The World Bank
St. Louis Fed – U.S. data

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