The "Vicious Circle" Hypothesis: The Greek Case

Panayo opoulos, Dimi is A icle The "Vicious Ci cle" Hypo hesis: The G eek Case K edi und Kapi al P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Panayo opoulos, Dimi is (1983) : The "Vicious Ci cle" Hypo hesis: The G eek Case, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 16, Iss. 3, pp. 394-404, h ps://doi.o g/10.3790/ccm.16.3.394 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/292971 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ The "Vicious Ci cle" Hypo hesis: The G eek Case By Dimi is Panayo opoulos, A hens I. In oduc ion The double digi in la ion all coun ies (indus ial, de eloped and de eloping) ha e expe ienced du ing he las decade is a ibu ed: a) o he sha p ise in he oil p ises in he la e 1973 and again 1979, b) o he conside able inc ease in he commodi y p ices, and c) o he adop ion and implemen a ion o he loa ing exchange a e egime by almos all he indus ial and de eloped coun ies since ea ly 1973. By passing he wo oil p ice shocks and he commodi y p ice hike, due o hei undispu ed ole in agg a a ing and eeding he in la ion o las decade, he ocus is on he ole and he impac o he lexible exchange a e egime on wo ld in la ion. This sys em o exchange a es has been adop ed by almos all coun ies, and specially by all indus ial coun ies, and i is in e ec up o his day, unin e ap edly, since i s implemen a ion in ea ly 1973. The in la iona y impac associa ed wi h he wo king o he lexible exchange a e egime has been a ibu ed, by some economis s, e en p oponen s o he adop ion o his sys em o exchange a es, o he emo al o he "discipline a gumen s" wi h which he sys em o lexible exchange a es is associa ed wi h. John F. O. Bilson1 in his pape "The Vicious Ci cle Hypo hesis" says: " he mo e o a lexible exchange a e egime emo es he balance o paymen s cons ain on he money supply mechanism and hence elimina es he las ba ie o an in la iona y spi al. Fo he i s ime in his o y he cen al banks o he majo indus ial coun ies do no ace any ex e nal cons ain in hei abili y o inc ease he s ock o he high-powe ed money". A. D. C ocke and M. Golds ein in hei pape "In la ion Unde Fixed and Flexible Exchange Ra es",2 a e making and o e all e alua ion o he discipline a gumen (pp. 531-537), do accep he ela i e in la iona y 1 Bilson (3), p. 5. 2 C ocke and Golds ein (6). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 The "Vicious Ci cle" Hypo hesis 395 impac o he lexible exchange a e sys em o e ha o ixed exchange a es egime. Howe e , hei answe o he ques ion hey impose "A e lexible exchange a es mo e in la iona y han a sys em o ixed exchange a es?" is: "I all depends".3 They do accep , hough, ha : " he e does appea o us o be a case . . . o supposing ha lexible exchange a es make i easie o in la iona y p essu es o a ise and o be accomoda ed han do ixed a es".4 Howe e hei o e all conclusion eads as ollows: " he ype o exchange a e sys em has ela i ely li le in luence on he a e age a e o wo ld in la ion".5 The in la iona y impac o he lexible exchange a e egime is a ibu ed o he g ea e mone a y au onomy ha a coun y enjoys ope a ing unde his sys em compa ed o ha o he ixed exchange a es. This g ea e mone a y au onomy a coun y enjoys unde he sys em o loa ing a es is no o be unde s ood, hough, on he basis o he limi ed o comple e absence o i s cen al bank's in e en ion in he o eign exchange ma ke , as his sys em p esupposes,6 bu a he i has o be unde s ood as he cen al banks' abili y and esponsibili y in choosing and implemen ing i s own mone a y policy independen ly om he policy choice made by o he cen al banks, i.e. he emo al o he "discipline a gumen ". The ex en o he mone a y au onomy a coun y enjoys ope a ing unde he sys em o lexible exchange a es and he way i a ec s i s exchange a e has c ea ed ambigui ies bo h on heo e ical and empi ical g ounds. A passage om he Annual Repo o he Bank o In e na ional Se lemen s is i id on he complexi y o he issue: "Acco ding o one iew, he g ea e mone a y au onomy which coun ies enjoy unde a loa ing egime implies ha exchange a e mo emen s will passi ely e lec he in la ion a es which coun ies 'choose' o main ain ela i e o in la ion in o he coun ies. 3 Ibid, p. 537. 4 Ibid, p. 537. 5 Ibid, p. 537. 6 Theo e ically, unde he sys em o lexible exchange a es he cen al banks do no in e ene in he o eign exchange ma ke ac which pe mi s he mone a y au ho i ies o ha e g ea e oom o conduc ing he mone a y policy hey choose o domes ic pu poses. The expe ience, hough, since he implemen a ion o he sys em o loa ing exchange a es in ea ly 1973, is exac ly he opposi e, i.e. he cen al banks o all coun ies and mainly hose which hei cu encies a e hea ily aded in he o eign exchange ma ke ha e in e ene in many imes and o a g ea ex en since he implemen a ion o he sys em o loa ing exchange a es. 26* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 396 Dimi is Panayo opoulos While he e is conside able u h in his iew, expe ience has shown ha he in e ela ionships be ween in la ion and loa ing a es a e much mo e complex. The casual ela ions un in bo h di ec ions and o en end o be sel - ein o cing. This s ems om he ac ha mo emen s in exchange a es may o en be he esul o changes in such ac o s as con idence, expec a ions and he mone a y/ iscal policy mix. Hence hey can, h ough hei in luence on impo and expo p ices, exe an independen e ec on he a e o domes ic p ice and wage in la ion. The in luence is pa icula s ong in open economies wi h la ge ading sec o s and in economies whe e wage espond p omp ly o changes in he consume p ice le el".7 Which one o he abo e wo iews holds ue, namely, i he causal ela ion uns om p ices o exchange a es o i i uns om exchange a es o p ices, i is an empi ical issue. The dep ecia ion/p ice in la ion spi al, he so-called " he icious ci cle hypo hesis", has been in es iga ed in nume ous s udies. These s udies ound s a is ical e idence o he wo king o he " icious ci cle hypo hesis" using he Sims-G ange causali y es o exchange a e - p ice ela ionship. Bilson in his pape has aised objec ion as o he co ec ness o his causali y es . Speci ically he ques ions he causali y es on he g ound ha i "igno es he ac ha he exchange a e is an endogenous a iable. The causali y es may indica e ha exchange a es "cause" p ices when he co ec explana ion is simply ha exchange a es espond mo e apidly han p ices o changes in unde lying economic condi ions".8 Fu he , in he conclusion o his pape he emphasizes ha he expansiona y mone a y policy is he cause o bo h he exchange a e dep ecia ion and he domes ic in la ion. Speci ically: "Al hough i appea s ha he exchange a e causes subsequen mo emen s in p ices and wages, he pape has demons a ed ha he p obable cause o bo h he dep ecia ion o he exchange a e and he in la ion o domes ic p ices is an expansiona y money supply".9 The Bank o In e na ional Se lemen s is a ibu ing as well o domes ic de elopmen s and speci ically o he mone a y policy, he cause o why some coun ies "go in o he icious ci cle".10 The pu pose o his pape is o in es iga e i G eece has go in o a icious ci cle by applying he G ange causali y es . Despi e he wo heo e ical 7 Bank o In e na ional Se lemen s, Annual Repo , 1976, p. 31. 8 Bilson (3), p. 3. 9 Ibid, p. 33. 10 Bank o In e na ional Se lemen s, Annual Repo , 1977, p. 38. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 The "Vicious Ci cle" Hypo hesis 397 objec ions11 aised by Bilson conce ning he applicabili y o he Sims- G ange causali y es s o he s a is ical e i ica ion o he in e ela ionship exis ing be ween exchange a es and p ices i seems ha , o eason gi en immedia ely below, he i s o his objec ions, i. e. he endogenei y o bo h he exchange a es and p ices, is no alid in he case o G eece, a leas . As i has been a gued elsewhe e by he au ho 12 he money supply is no he decisi e ac o in de e mining he exchange a e o d achma. Fi s , he in e es a e is no subjec and i is no de e mined by he ee in e play o he ma ke o ces in he money ma ke , bu , on he con a y, he le el o he in e es a e is "adminis e ed" by he mone a y au ho i ies. Second, he ee capi al mo emen , especially he ou low o unds, is o ally p ohibi ed in G eece. Thus, he absence o hese wo impo an ac o s can easonably be conside ed esponsible o he "exogenei y" o he exchange a e o d achma. Consequen ly, he Sims-G ange causali y es can be alidly applied o e i y he in e ela ionship exis ing be ween exchange a es and p ices, since one only o hese pa ame e s is endogenous (i.e. p ices) while he o he (i.e. exchange a es) can easonably assumed, wi h he a ionale gi en abo e, o be exogenous. n. Tes ing he Hypo hesis Tes ing o causali y be ween he exchange a e and p ices in G eece unde bo h exchange a e egimes, ha is unde he lexible exchange a e egime and unde he ixed exchange a e egime, he G ange causali y es is applied.13 The G ange es is p e e ed o e ha o Sims es o he ollowing easons: a) he G ange es equi es only pas alues o he independen a iable, so he leng h o he lag s uc u e is de e mined by he use , and b) since he pape aims a e i ying he in e ela ionship be ween exchange a es and p ices unde bo h exchange a e egimes, he G ange es has he ad an age o in e p e ing mo e easily he exis ing causali y be ween he a iables unde di e en exchange a e sys ems.14 11 The i s o hese objec ions has been p esen ed abo e, p. 3. The second objec ion associa ed wi h he icious ci cle hypo hesis is ha i "neglec s he expendi u e - educing ole o he exchange a e in he adjus men p ocess". Bilson, p. 4. 12 Panayo opoulos (9), p. 373. 13 G ange , C. W. I. (7). 14 On he same line o easoning a e he a gumen s o Mixon, P a and Wallace (8) o p e e ing and making use o G ange es o e ha o Sims es . OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 398 Dimi is Panayo opoulos The G ange causali y es es ima es equa ions in he o m: n m (1) X = a0 + 2 bj X -j + 2 Cj Y -j + e i = i j = i and m n (2) Y = d0 + 2 9j Y -j + 2 kj X -j + u i = i j = i I he cj's (j = 1, . . . , m) a e assu ed o be equal o ze o, i.e. Ci = c2 = . . . = cn = 0, i is in e ed ha Y does no causes X and hus equa ion (1) is educed o n (1') X = a0 + 2 >j X -j j = i The G ange causali y es is conduc ed as ollows. Ini ially, equa ion (1') is es ed whe e he dependen a iable X is eg essed on i s lagged alues. This is e e ed o as es ic ed equa ion. Then, equa ion (1) is es ed, whe e he dependen a iable X is eg essed on i s lagged alues and on he lagged alues o an added a iable Y. This is e e ed o as un es ic ed equa ion. The null-hypo hesis, ha is Ci = c2 = . . . = cn = 0, in equa ions (1) and (1') is es ed using he F-s a is ic. I i u ns ou he alue o he F-s a is ic o he es ima ed equa ions o be signi ican , i.e. g ea e ha he c i ical F' alue, hen i is in e ed ha Y causes X. I he opposi e hold ue hen i is in e ed ha Ydoes no causes X. The F-s a is ic is o he o m: (SSRq - SSRk)/Q - K FQ-K,n-Q (SSRQ)/n - Q whe e K is he numbe o es ic ions placed on equa ion (1') and Q is he numbe o es ic ions placed on equa ion (1) and n he numbe o obse a ions. III. The Empi ical Tes s In he con ex o he p esen pape he in e ela ionship be ween he exchange a e (D achma) and he domes ic p ices is es ed unde bo h exchange a e egimes, i.e. unde he sys em o lexible exchange a es applied a e 1973 and unde he sys ems o ixed exchange a es ha p e ailed be o e 1973. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 The "Vicious Ci cle" Hypo hesis 399 The b eak down in he ime se ies in 1973 migh be objec ed since G eece held i s cu ency ixed o he U.S. dolla up o Feb ua y 1975 ( he ixed pa i y be ween d achma and U.S. dolla was in e up ed o a sho pe iod only, om Oc obe 1973 o Janua y 1974). This a gumen is no alid o he ollowing easons: Fi s , despi e he ac , ha G eece is conduc ing he in e na ional ade mainly in he U.S. dolla , he G eek d achma dep ecia ed o a conside able ex end is-a- is he cu encies o all o he coun ies (i.e. F ench F anc, Deu schma k, e c.) wi h which he olume o ade (goods and se ices) canno be conside ed negligible. Second, since all he indus ial coun ies le hei cu encies loa , in ea ly 1973, he p ices o he impo ed goods (and se ices) a e assumed o ha e a ec ed, since hen, he domes ic p ice le el ( he impo p ices a ec almos ins an ly he domes ic p ice le el). Thi d, domes ic ac o s suppo as well he b eak down o he ime se ies in 1973. Namely, since 1973 consume p ices s a ed aising e y as as opposed o he pe iod be o e 1973. Despi e he a gumen s gi en abo e o jus i y he b eak down o he ime se ies, unde conside a ion, in wo subpe iods aking as a cu o poin he yea 1973, he Chow es , which comp ises a o mal me hod o decide upon he possibili y o pooling o no he da a, was pe o med. The Chow es , using as cu -o poin he yea 1973, indica ed ha he da a canno be pooled. Thus, he ime se ies we e di ided in wo subpe iods. One o he ime pe iod be o e 1973, du ing which he ixed exchange a e sys em was in ope a ion, and he o he o he ime pe iod a e 1973, du ing which he lexible exchange a e sys em was adop ed. The da a used in he empi ical es a e mon hly obse a ions o he a iables, no seasonally adjus ed. A log-linea ela ionship is assumed be- ween he a iables. Because he causali y es equi es co a ience s a iona i y he da a ha e been con e ed o i s di e ences. Va ious me hods a e employed o ans o m he non-s a iona y ime se ies o co a ience s a iona y se ies since he causali y es equi es he a iables o be join ly co a ience s a iona y. One widely used me hod is he one p oposed by Box and Jenkins.15 They sugges ha he elimina ion o non- s a iona i y can be achie ed making use o he il e (I - B)d, wi h (d) equal o 1 o 2. 15 Box-Jenkins (4). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 400 Dimi is Panayo opoulos Va ious esea che s make use o he Box-Jenkins app oach each one using di e en o m o il e , depending on he na u e o he a iables used. In his pape he Box-Jenkins app oach is no u ilized. The es ima ed equa ions using he G ange causali y es a e he ollowing: 12 12 (3) (CPI) = a0 + 2 6, (CPl) .j + 2 § (EXR) -j i = i j = i and 12 12 (4) (EXR) = dQ + 2 h (EXR) .j +2 Cj (CPl) -j j = i j = I wi h 12 mon h lagged s uc u e, whe e: CPI: he a io o he G eek and he Ge man consume p ice indices EXP: he D achma/Deu sch ma k exchange a e. These equa ions a e used o in es iga e he in e ela ionship be ween exchange a e and p ices. To in es iga e he ela ionship be ween money supply and exchange a e he ollowing equa ions a e es ima ed: 12 12 (5) (M) = a>o + 2 bj (M) -j + 2 ^ (EXR) ^ 3=1 j=1 and 12 12 (6) (EXR) = d0 + 2 bj (EXR) -j + 2 (M) _j j = i j = i wi h 12 mon h lagged s uc u e whe e: M: he a io o he G eek and Ge man money supply na owly de ined. The a ionale o using he D achma/Deu sch Ma k exchange a e is wo old. Fi s i has o do wi h he subs ance o he es unde aken and, second i is associa ed wi h he s a is ical limi a ions imposed by he da a. As a as he i s o he abo e a gumen s is conce ned he answe eads as ollows: The G eek in la ion a e cons an ly a exceeds ha o Ge many. The in la ion a e di e en ial wo king agains G eece is an impo an a iable in he decision making p ocess o he G eek Cen al Bank in es ablishing he D achma/Deu sch Ma k exchange a e coping wi h he compe i i eness o G eek expo s and he cos o he impo ed goods. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20 The "Vicious Ci cle" Hypo hesis 401 On he o he hand, Ge many is he single mos impo an ade pa ne o G eece. In e ms o he me chandise ade, he alue o G eek expo s ep esen s he 19% o i s o al expo s and he impo s om Ge many he 14% o G eece's o al impo s. I he alue o he in isible ade is also included ( ou ism, wo ke 's emmi ances, e c.) hen he alue o he in e - na ional ansac ions be ween hese wo coun ies a exceeds he abo e igu es. As a as he second a gumen is conce ned he s a is ical limi a ions in using he D achma/U.S. dolla exchange a e is o be no ed. The D achma/ U.S. dolla exchange a e emained ixed du ing he pe iod be o e 1973. This ac makes impossible o a s a is ical es o be unde aken o he pe iod be o e 1973 and hus he compa ison be ween he wo exchange a e egimes, which is he pu pose o his pape , canno be achie ed. VI. The Resul s In he ollowing Table 1 he esul s o he es ima ion o he abo e equa ions a e gi en whe e he ela i e p ice le el, he ela i e money supply, and he exchange a e o G eece and Ge many a e used o he pe iod be o e he implemen a ion o he lexible exchange a e in 1973, i.e. 1965 - 1972, and o he pe iod a e he implemen a ion o his exchange a e sys em, i.e. 1973 - 1980. Table 1 No. o Equa . Func ional Rela ionship Time Pe iod F- S a is ic (3) Rela i e p ice le el eg essed 1973 - 1980 3.6897* on exchange a e (D ch/DM) 1965 - 1972 .3372 (4) Exchange a e (D ch/DM) 1973 - 1980 .6088 eg essed on ela i e p ice le el 1965 - 1972 .2804 (5) Rela i e money supply eg essed 1973 - 1980 .7299 on exchange a e (D ch/DM) 1965 - 1972 .4081 (6) Exchange a e (D ch/DM) 1973 - 1980 2.2892** eg essed on ela i e money supply 1965 - 1972 .6413 Da a Sou ces: OECD; Main Economic Indica o s; Bank o G eece; Mon hly Bulle in. The deg ees o eedom (12,59) a e he same o all equa ions in bo h ime pe iods. * Signi ican a 1 % le el; ** Signi ican a 5 % le el. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.16.3.394 | Gene a ed on 2023-01-16 12:49:20