Front Matter

Front Matter Page

©1999 International Monetary Fund

December 1999

IMF Staff Country Report No. 99/138

Greece: Selected Issues

This Selected Issues report on Greece was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with this member country. As such, the views expressed in this document are those of the staff team and do not necessarily reflect the views of the Government of Greece or the Executive Board of the IMF.

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Front Matter Page



Selected Issues

Prepared by a staff team consisting of Ioannis Halikias, Phillip Swagel (EU1), and William Allan (FAD)

Approved by the European I Department

October 5, 1999


  • Selected Economic Indicators

  • Introduction and Overview

  • I. Inflationary Implications of EMU-Related Monetary Easing: An Econometric Estimate

  • Figure 1. Response of Inflation to Shocks

  • References

Greece: Selected Economic Indicators

(Percentage changes, unless otherwise indicated)
article image
Sources: Data provided by the authorities; and Fund staff estimates and projections.


Drachma/ECU before 1999.

End-September compared with end-December.

July compared with December.

August compared with December.

M4N is defined as M4 plus foreign currency deposits by residents and investments in money market mutual funds by investors. M4 is the sum of currency, private deposits, bank bonds, and repos (all of which constitute M3), plus private sector holdings of T-bills and government bonds of maturity of up to one year.

12-month change in August.

12-month change in June.

Latest auction August 17, 1999.

Latest auction September 28, 1999.


Introduction and Overview

1. The government has set Greece’s participation in EMU by January 2001 as its central economic goal. In the drive toward this goal—for which a positive outcome is now generally anticipated—the main remaining policy challenge is to achieve and sustain price stability.1 The first three chapters of this selected issues paper examine various aspects affecting inflation prospects in Greece in both the near- and more medium-term horizons. In addition, Greece ranks among the few Fund member countries that have completed a self-assessment against the IMF Code of Good Practices on Fiscal Transparency—Declaration on Principles. Chapter IV presents an experimental report based on the self-assessment, along the lines of other such reports that have been prepared in the context of the Fund’s recent initiatives on transparency, codes and standards. The final chapter outlines ways in which development of certain aspects of the fiscal information system could assist in addressing some of the medium and long-term issues of fiscal policy in Greece.

2. The strategy to bring inflation down to levels consistent with achieving the Maastricht criteria has involved a tight monetary policy stance, centered on high interest rates and a strong drachma within the ERM/ERM2 bands. While interest rate convergence at the long end of the spectrum has been substantial (with differentials against ten-year German-bond rates falling from more than 400 basis points in the third quarter of 1998 to less than 160 basis points at present), those at shorter maturities remain more than 700 basis points above equivalent euro rates. In addition, the drachma has been trading substantially above its central ERM2 parity rate. The prospect of EMU entry, with a complete convergence in short-term interest rates to euro-area levels and a depreciation of the drachma to its central parity, thus implies a significant easing of monetary conditions—in fact by an amount substantially larger than that experienced in a number of other first-wave EMU entrants, some of which have subsequently recorded inflation rates appreciably above the euro average. Chapter I (by Phillip Swagel) attempts to econometrically determine the inflationary implications of the EMU-related easing of monetary conditions with a structural vector autoregression (VAR), and to estimate, as an illustrative exercise, the required fiscal offset in the absence of other anti-inflationary steps (notably wage moderation and structural reforms that enhance competition). It finds that the monetary easing would, ceteris paribus, impart an increase in inflation of almost 1½ percentage points by mid-2002, and twice this amount by 2003, with adverse implications for the sustainability of price stability. Absent other anti-inflationary steps, the cumulative fiscal contraction required to offset the easing of monetary conditions (based on a fiscal multiplier of 1.5) would be in excess of 3 percent of GDP over the next two years, with a further effort also required in the third year after the monetary easing. While recognizing that recent changes in the Greek economy suggest that the estimate of the inflationary impact of the monetary easing (and thus of the required fiscal offset) probably errs on the high side, the exercise is suggestive of the broad order of magnitude of the task at hand and indicative of the need to harness other policies (notably wage moderation and structural reforms) in securing price stability on a sustainable basis. In sum, a menu of instruments and reforms would best allow Greece to counter the inflationary consequences of the monetary easing implied by EMU convergence.

3. In examining the influence of monetary easing on inflation and the needed offset to activity to maintain price stability, it could be questioned whether such an inherently simple model as employed in the previous chapter, utilizing variables pertaining to overall economic activity and estimated over a period during which financial markets have undergone fundamental change, can fully take into account all of the various factors that could potentially affect inflation. Specifically, it has been suggested that, owing to the large stocks of bank deposits and government paper held by Greek households, a decline in interest rates would entail a large reduction in household income that would depress consumption to such an extent that it might offset partially, or even fully, the expansionary impact of lower interest rates on other components of aggregate demand. Chapter II (by Ioannis Halikias) attempts to shed some light on this question by looking at the experience of, and model predictions for, three southern European economies in the euro area that, to varying degrees, bear some relevant similarities to Greece’s situation, and that underwent a process of interest rate convergence in recent years.2 While the results differ slightly depending on the model employed, the empirical findings suggest that policy formulation should not rely on the income effect on households to offset the expansionary impact of a reduction in interest rates. For all three countries considered, an interest rate cut boosts consumption (and overall economic activity), at least over a policy-relevant time horizon: there is a strong likelihood that this would hold for Greece as well.

4. Looking beyond the short-run effects of monetary easing, it is also useful to examine factors that may have a more lasting influence on inflation in Greece. Chapter III (by Phillip Swagel) examines the “Balassa-Samuelson effect,” which arises from the differential pace of convergence in the levels of productivity in Greece’s tradable and nontradable sectors to those of trading partners. Economies that are experiencing higher productivity growth in the tradables sector than in nontradables will tend to have higher inflation rates for nontraded goods such as services, as nominal wage growth will tend to exceed productivity growth in the nontradables sector. This is especially relevant in economies such as Greece’s in which a highly centralized system of wage setting ensures that wage growth in nontradables largely keeps pace with that in tradables, despite lower productivity growth. Overall inflation is a weighted average of inflation in the two sectors, so that the Balassa-Samuelson effects lead to higher inflation than would be the case were productivity growth even across sectors. In Greece, the Balassa-Samuelson effect is found to have contributed to an additional 1 percentage point to annual inflation on average over 1960–1996. This inflation differential leads to an appreciation of the real effective exchange rate based on relative consumer prices; however, as this appreciation reflects increased productivity in tradables, it would not represent a loss in external competitiveness. Looking forward, the Balassa-Samuelson effect can be expected to remain an influence on inflation, as the level of productivity in tradables in Greece remains substantially below that of its EU partners.

5. The Greek authorities have completed a self-assessment against the IMF Code of Good Practices on Fiscal Transparency—Declaration on Principles. The assessment, which is reviewed in Chapter IV, indicates that significant steps have been taken toward improving fiscal transparency in recent years, while also acknowledging areas where further steps are to be taken. Some measures, consistent with the direction of current reforms, are suggested by the staff under each of the general principles of the transparency code. Emphasis is given to the need to extend the coverage of the information provided in the budget report to include all off-budget activities and extend the timeframe for budget analysis.

6. Chapter V (by William Allan) examines three interrelated areas in which improvements in the fiscal information system could aid in policymaking: developing the accounting framework; assessing fiscal risks; and assessing the sustainability of fiscal policy. First, developing an accounting framework based on a general government balance sheet would provide an important basis for examination of long-term sustainability, help to impose discipline on year-to-year operational decisions in annual budgets, and facilitate the coordination of various decisions being made about the creation and disposal of public enterprise assets and government equity holdings. Second, a consolidated fiscal risk statement in each annual budget, incorporating information already provided (including the macroeconomic assumptions underlying the budget and information relating to the stock of outstanding government guarantees), as well as information relating to other contingent liabilities and the impact on the budget of variations in economic assumptions, would indicate to the public and financial markets how these risks have been taken into account in budget decisions. Third, the periodic preparation of long-term fiscal scenarios would provide a means to explore the impact of demographic and other structural changes that would affect the economy and fiscal position over an extended time period. This is especially relevant in the Greek context, in light of its presently high debt burden (although potentially mitigated through the privatization of a high stock of claims on state-owned enterprises), as well as by the anticipated pressures arising from rapid population aging early in the next century. Moreover, periodic assessments of fiscal sustainability could help resolve potential conflicts between the focus on short-term objectives and longer-term fiscal constraints.


  • II. Interest Rate Convergence and Household Consumption: How Important is the Income Effect?

    • A. Introduction

    • B. Some Stylized Facts and Theoretical Considerations

    • C. Oxford Economic Forecasting Model Simulations

    • D. Bank of Italy Model Simulations

    • E. Concluding Remarks

  • Figures

  • 1. Interest Rates and Consumption

  • 2. Consumption and Consumer Credit

  • References

  • III. The Contribution of the Balassa-Samuelson Effect to Inflation: Cross-Country Evidence

    • A. Introduction and Summary of Results

    • B. Background and Methodology

    • C. Data and Preliminary Evidence

    • D. Estimation Results

    • E. Conclusion and Implications for Greece

  • Tables

  • 1. Data Summary

  • 2. Cointegrating Relationships Between Relative Prices, Productivity, and Wages

  • Figures

  • 1. Cross-Sector Productivity Growth and Inflation Differentials

  • 2. Effect of One Percentage Point Shock to Relative Total Factor Productivity on Relative Prices and the Inflation Rate

  • 3. Contribution of Balassa-Samuelson Effect to Inflation, 1960–96

  • 4. Contribution of Balassa-Samuelson Effect to Inflation, 1990–96

  • References

  • IV. Fiscal Transparency: An Experimental Report

    • A. Description of Practice

      • Clarity of roles and responsibilities

      • Public availability of information

      • Open budget preparation, execution, and reporting

      • Independent assurances of integrity

    • B. Staff Commentary

  • V. Improving Information on Risk and Sustainability of Fiscal Policy

    • A. The Accounting and Statistical Framework

    • B. Fiscal Risks in the Annual Budget and Medium Term

      • Toward a statement of fiscal risk

      • Improved planning and risk mitigation measures

    • C. Long-term Fiscal Sustainability

  • Text Boxes

  • 1. A Balance Sheet Approach for Government

  • 2. Uncertainty, Sensitivity, and Fiscal Risks

  • Tables

  • 1. Central Government Budget Execution: Deviation from Budget

  • 2. General Government Sensitivity Analysis

  • References

  • Statistical Appendix Tables

  • 1. Aggregate Demand (at constant prices)

  • 2. Aggregate Demand

  • 3. Private Sector Income Account

  • 4. Saving-Investment Balance

  • 5. Agricultural Production

  • 6. Manufacturing Production

  • 7. Price Developments

  • 8. Implicit Price Deflators

  • 9. Cost-Push Indicators of Inflation

  • 10. Labor Force, Employment, and Unemployment

  • 11. Employment in Selected Sectors

  • 12. Wages and Salaries in the Nonagricultural Sector

  • 13. Employment, Productivity, and Unit Labor Costs in Manufacturing

  • 14. Collective Labor Agreements, Compulsory Arbitration and Impact of Labor Disputes

  • 15. Summary of Central Government Finances

  • 16. Ordinary Budget Revenue (In billions of Drachmas)

  • 17. Ordinary Budget Revenue (In percent of GDP)

  • 18. Ordinary Budget Expenditures

  • 19. Investment Budget Expenditure by Sector

  • 20. Budget Transfers from and to the European Union

  • 21. Central Government Expenditure, Functional Classification

  • 22. Summary of General Government Finances (In billions of Drachmas)

  • 23. Summary of General Government Finances (In percent of GDP)

  • 24. Public Entities Balance

  • 25. Public Enterprise Balance

  • 26. Operating Balance of Selected Public Enterprises

  • 27. Financing of the PSBR

  • 28. Gross General Government Debt

  • 29. Monetary Program and Outturn

  • 30. Monetary Survey

  • 31. Growth of Money and Credit Aggregates

  • 32. Distribution of Bank Credit to the Private Sector

  • 33. Short-Term Interest Rates

  • 34. Official Interest Rates

  • 35. Bank Interest Rates

  • 36. Interest Rates on Government Paper

  • 37. Exchange Rates

  • 38. Official Reserves

  • 39. Balance of Payments

  • 40. External Services and Transfers

  • 41. External Current Account Deficit and Financing

  • 42. Current Account of the Balance of Payments

  • 43. Selected Indicators for Trading Partners

  • 44. Capital Account

  • 45. General Government External Debt

  • 46. External Debt Service

Greece: Selected Issues
Author: International Monetary Fund