in the pursuit of this goal gained ground. these ideas underpinned the monetary policy of the bank of greece in the 1990s as it sought to support the effort to satisfy the maastricht treaty criteria and to join the euro area on 1st january 2001. the bank ’ s ability to attain its goals was considerably improved by the abolition of the monetary financing of the fiscal deficit, mandated under the maastricht treaty, in 1994, and the law, enacted in 1997, granting independence to the bank of greece with a mandate to achieve price stability. in an effort to bring down inflation, in the mid - 1990s the bank adopted a “ hard - drachma policy ”, under which the exchange rate was used as a nominal anchor. real interest rates were kept at high levels to help ensure the success of this policy. the hard - drachma policy operated, at times, under difficult conditions, yet it proved highly credible and immensely successful. ironically, the source of the difficulty was related partly to the success of the policy. the policy ’ s credibility led to enormous inflows of foreign capital, complicating the conduct of monetary policy. the bank was able to neutralise these inflows, absorbing excess liquidity and thus buying time for other policies to adjust. within three years of the policy, inflation was more than halved, falling to under 5 per cent, while economic growth accelerated sharply. the fiscal consolidation that took place beginning in the mid - 1990s, and moderation in wage increases, contributed importantly to an increasingly - sustainable policy mix, enhancing the credibility of monetary policy. with the outbreak of the asian financial crisis in late 1997, and its spread to other parts of the world, there were pressures on the drachma. the bank of greece initially raised interest rates to stem these pressures. then, in march 1998, the drachma entered the exchange rate mechanism of the european monetary system, so that it could satisfy a maastricht criterion, and was devalued to help maintain international competitiveness. unlike the currency devaluations in many other countries around this time, the drachma ’ s devaluation was not followed by the aftershock of a banking and financial crisis. a well - supervised greek banking sector, with adequate prudential regulations in place, limited the exposure of commercial banks to foreign currency risk and, therefore, safeguarded the financial system. in the years following the drachma ’ s entry

##played the connection between monetary policy and inflation, were at their peak. in greece, during the second half of the 1970s and the 1980s, the central bank conducted monetary policy under difficult circumstances, as the policy mix was often inappropriate. compounding the difficulty of the bank ’ s task was the fact that the financial system operated under a complex framework of rules and provisions, which proved not only ineffective, but also distorted credit allocation and limited the scope for conducting an effective monetary policy. the abolition of the currency committee in 1982 and the transfer to the bank of greece of its functions in the fields of monetary, credit and exchange - rate policies as well as banking supervision marked the beginning of a new era in the bank ’ s history. with broader responsibilities, beginning in the mid - 1980s and until the mid - 1990s, the bank of greece undertook the leading role in the deregulation of the financial system. financial liberalisation was a gradual process, however, so that the lifting of controls could take place in tandem with the restructuring of the economy and thus avoid the potentially destabilising effects of abrupt and sharp reversals of international capital flows. this strategy proved wise ; in the 1990s many asian economies, which had not given sufficient consideration to sequencing, were exposed to severe financial crises. after financial liberalisation in greece had been completed in the mid - 1990s and up to entry into emu and the adoption of the single monetary policy in january 2001, the bank of greece had at its disposal more effective and flexible market - oriented means of monetary control and was able to react quickly and effectively to changes in economic conditions. the supervisory functions of the bank have also changed considerably, shifting from the task of ensuring commercial banks ’ compliance with credit and exchange controls and regulations, to the monitoring and the evaluation of bank asset quality, and the solvency and capital adequacy of these financial institutions. during the late 1980s and the 1990s, a substantial shift occurred in thinking about the role of the central bank in the economy. experience of past episodes of hyperinflation in various countries, as well as of moderate inflation, exemplified in the breakdown of the bretton woods system, led to the finding that monetary policy is not necessarily independent of the government of the day. sometimes central banks have to finance government spending and this results in higher inflation and, ultimately, lower growth. thus, the views that the goal of monetary policy should be to provide price stability and that the central bank should be made an independent institution