—The paper demonstrates the disequilibrium dynamics emerged in a fixed exchange rate arrangement under price inertia in the form of the conflict between UIRP rule and PPP rules. An initial divergence in price is self-growing and put strains to the arrangement itself. The disequilibrium dynamics are initially highlighted in the context of the Dornbusch’s overshooting model applied in a fixed exchange rate regime. Greece is used as a case study in this respect. The paper reveals that the crisis in the euro-zone periphery was not driven by market myopia or animal spirits, but was temporarily essential to equilibrate the system. Furthermore, the decline in the money supply precedes the decline in spending and this provides a strong challenge to Keynesian view. However, neither the Keynesians nor the monetarists focus on the role of instability of credit on the money supply. A Granger causality test demonstrates the impact of credit on the money supply.
—Disequilibrium, overshooting, monetary union, Greece.
The author is with the Research Department at the Hellenic Deposit and Investment Guarantee Fund, Greece (e-mail: email@example.com).
Cite: Theo Kiriazidis, "The Disequilibrium Dynamics of the Monetary Union: The Case of Greece," International Journal of Trade, Economics and Finance vol.6, no.6, pp. 318-326, 2015.