A NOTE FROM ANISTORITON
This is a paper in financial economics and at first look it might seem that it has nothing to do with history. However, the Anistoriton Editorial Board believes that any work with historical content is part of History. A historian must be a bit of an economist, a lawyer, a scientist and we urge undergraduate student to take courses covering the widest possible spectrum of scholarship. On the other hand, this paper definitely needs some experience with economics and mathematics in order to be fully understood. That is why, we publish here only the Introduction that incorporates the main points from a historical point of view. The full paper is provided in PDF from at the bottom of this page and may be read with the use of Adobe Acrobat Reader .

The authors wish to thank Professor K Holden, Liverpool Business School, for his helpful comments and suggestions in the preparation of this paper but we would like to emphasise that any errors remaining the paper are entirely our responsibility. January 2001

ABSTRACT
The paper examines the demand for narrow money in Greece over the period 1962 to 1998. The data is tested to examine the order of integration. Estimation of the demand function follows the two-step methodology. The first step entails the specification of the long run equilibrium relationship between real narrow money, the index for industrial production (a proxy for real income), an interest rate and the rate of inflation through the estimation of the co integrating vector by the Johansen technique. The second step involves an Error Correction Equation being estimated to provide the short-run dynamics. Finally the model is simulated to see how well it tracks the actual values of the dependent variable. Journal of Economic Literature Classification: E41.

The demand for money assumes an important component of theoretical models of any economy and as such has been the subject of many studies for a wide variety of countries. In section 1 of this paper we start by providing a brief review of the financial history of Greece and a summary of what we consider to be key studies of the demand for money in Greece. A discussion of the nature of the data is presented in section 2. The empirical results are discussed in sections3 and 4. The model is tested for its simulation properties in section 5and our conclusions in section 6.

The Greek financial system was heavily regulated during the post-war period until the mid-eighties. Major characteristics of this system are the administratively set interest rates, the compulsory channeling of a proportion of bank reserves into various uses and sectors indicated by the authorities, the financial support of the government at below-market rates and the control of foreign exchange transactions. Given that banks were the dominant financial intermediaries while capital market was underdeveloped, investment opportunities were heavily dependent to the government priorities.

However, this picture altered, during the late eighties and nineties, through a process of financial liberalization that aimed to restore market conditions throughout the system. Important steps included the gradual deregulation of bank lending and borrowing rates, the removal of credit restrictions imposed on commercial banks, the resumption of Treasury Bills sales directly to the public in 1985 and the abolition of controls in capital movements in 1994. In 1994, the government also lost its privileged access to the Central Bank while its monetary financing was abolished.

With respect to the formulation of the demand for money function the following points are important:

a) The underdevelopment of capital market along with the regulated nature of the system for most of the period indicates the significant role of real assets and hence of inflation (their rate of return) as a determinant of money demand.

b) The constrained opportunities for financial investments restrict the choice of a representative rate of return on financial assets as a rate of interest on bank deposits.

c) Finally, the transition period from regulation to liberalization during the last third of the estimation period raises the interesting question of the stability of demand for money along with the problem of the appropriate independent variables in this function. Figure 1 shows the growth of M1 during this period and, whilst the financial liberalisation discussed above must have affected the behaviour of the money supply, the pattern in Chart 1 shows no sudden changes or jumps in the time pattern of the growth of nominal narrow money supply. We have therefore not included any dummy variables to represent any of the measures discussed above 1 . In general our approach will be a compromise between the various traditions in the theoretical development of the demand for money and will include as explanatory variables the rate of inflation, the level of real GDP (y) and a representative rate of interest (r). Consequently we include both the return on financial assets (i.e. the representative rate of interest) and also the return on real assets {represented by the expected rate of inflation (infl)} as well as the demand for transaction purposes. This formulation is summarised below: ...

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