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48 NICHOLAS C. GARGANAS AND GEORGE S. TAVLASInstitutional SettingThe government played a key role in setting the objectives of monetarypolicy, especially in the early part of the first regime. Prior to 1982, the governmentexerted its influence directly, through what was called the CurrencyCommittee. This Committee, comprised of five Ministers and the Governorof the Bank of Greece, decided on monetary policies and targets, and frequentlyon detailed matters related to banking, foreign exchange, and thebalance of payments. The Currency Committee was abolished in 1982, but thegovernment continued to set the broad outlines of monetary and exchangerate policies.The behaviour of wages was a crucial determinant of the inflation outcomesof the second half of the 1970s and the 1980s. During the period 1975-81, weekly earnings of blue-collar workers in manufacturing rose by an averageof 22.7 per cent (Table 1-1). In 1982, the government introduced anautomatic wage indexation system (ATA), under which low wages were fullyindexed to past inflation at four-month intervals, while average and highwages were partially indexed. 3 As shown in Table 1-1, the average annualATA adjustment during 1983-90 was 15.6 per cent. Excluding the two years1986 and 1987, during which a temporary stabilisation programme had beenenacted (see below), the average ATA adjustment was 17.3 per cent; overthese same years (i.e. excluding 1986 and 1987), weekly earnings in manufacturingrose by an average of 23.1 per cent. The indexation system servedas a propagation mechanism through which an initial inflationary impulsecould affect wage outcomes, helping to lock in higher rates of inflation.Welfare Costs of Inflationary FinanceAs Corbo and Fischer (1994, p. 62) have noted, the arguments for seekingto reduce inflation are conceptually clear, even if they are difficult toquantify. 4 Inflation imposes significant economic and social costs. By distortingrelative price signals, generating uncertainty about future inflation,and generally reducing the information provided by the price system, inflationimpedes the allocation of resources and adversely affects economic effi-3. In 1986, the system was changed to one under which wages were adjusted every fourmonths in line with the government’s inflation forecasts. For a detailed discussion of the ATA,see Burtless (2001).4. Empirical evidence shows consistently that inflation is negatively correlated withgrowth. See, for example, Fischer (1993) and Barro (1995).