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₯ I catch both Lars Christensen and Brad DeLong making the claim that an introduction of the drachma will work wonders for Greece. Lars, for instance, says that: However, Grexit will also remove the monetary straitjacket, which has had caused an enormous amount of economic hardship in Greece since 2008. The removal of this straitjacket will cause a significant easing of Greek monetary conditions, which in my view very likely will cause a sharp rise in nominal GDP in Greece in the coming years. I hate to rain on the party, but even if a drachma is introduced and it collapses in value there won't necessarily be a drachma-induced recovery. Greece is currently in a straitjacket because its monetary standard -- the system for measuring and conveying economic value -- is a euro standard. Think of the euro as being akin to the metric system, a standard for measuring weights and distances, or dots per inch, a standard for measuring print resolution. An introduction of drachmas banknotes...

The upcoming Greek election has renewed interest in the idea of Grexit. This option is often presented to the Greek public as desirable given that it would restore an independent monetary policy to the nation. Beware, this is dangerous advice. The euro isn't a glove that you can take on and off, it's a Chinese finger trap; once in, it's tricky to get out. Even if Greece were to formally leave the euro, odds are that it would remain unofficially euroized, leaving it just as bereft of an independent monetary policy as before. The real trade off in a Grexit-or-not scenario is between formal membership in the euro with some say in monetary policy, no matter how small, or informal membership without any say whatsoever. The optimists, say someone like Hans-Werner Sinn , advise the Greeks to leave the euro and adopt a new currency. The value of this new drachma would immediately collapse. As long as prices in Greece are somewhat sticky, Greek goods & services will become incre...

I had an interesting conversation with Miles Kimball at his blog concerning his idea of splitting the Euro into a North Euro zone and a South Euro zone. This seems like a far more realistic solution than reintroducing drachmas, punts, pesos, and lira. Nevertheless, there are some thorny issues here which Miles says he will address in future blog posts. In short, a South Euro will quickly depreciate. Because wages are sticky, exports from the southern Euro zone will be relatively cheaper than exports elsewhere, providing a short to medium term boost to Greece, Italy, Spain, and Portugal. One concern here is that the continued circulation of North Euros in South Euroland, as well as the North Euro's continued use as a unit of account in South Euroland, would make those living in South Euroland highly cognizant of nominal changes and therefore less likely to fall prey to the degree of money illusion that is necessary to drive an export-led recovery. Of course, as Miles points out, hi...

John Cochrane has had a few interesting comments on Greece leaving the Euro, here , here , and here . Cochrane doesn't believe in the consensus view that a Greek default means a Greek euro-exit. He thinks Greece can default and stay in the Euro. He also makes the good point that Eurobonds already exist... in the form of Target2 transfers. His last post illustrates how difficult it would be to create a new drachma. I am sympathetic to many of his views. I had an interesting debate in the comments section of his last post on the difficulties of creating a new drachma. Someone pointed out that Gresham's law dictates that bad drachmas will easily drive out good euros. Therefore, drachmas will quickly gain currency. This is a mistaken view of how Gresham's law works: Gresham's law only applies when there are two circulating currencies and the authorities successfully enforce a peg such that one currency is artificially overvalued. The undervalued currency disappears from cir...