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On economic theory and the euro/drachma discussion December 19, 2011

Posted by proeconomia in Fiscal policy, Main, Monetary policy, News on Greece, On the crisis, Opinion.
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Read this one from Nikos Varsakelis, a colleague from the Aristotle University of Thessaloniki. At last a Greek economist that sets the record straight, and in doing so points to the obvious: all our theories are about the real economy and not the nominal so the choice of currency is, in the end, irrelevant.

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1. Constantina Kottaridi - December 19, 2011

Indeed, let’s put economic theory in place! Thanks to the colleague Nikos Varsakelis for at last pointing this out!
Talking about nominal exchange rates simply leaves the denominator out of the equation: what about prices? Trade takes place based on real exchange rates and not nominal, hence by simply using seignorage (printing money for finance reasons) does not alleviate the problem; it makes it worse because it raises prices and the so claimed “competitiveness” gained from lowered exchange rates, simply vanishes…that’s what we teach students even at the second year of their economic studies. And it is trully amazing how passionately some economists favor the exit from the euro! And I am wondering: who would really benefit from such a huge devaluation of oour currency then?


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