Working Paper: CEPR ID: DP330
Authors: George S. Alogoskoufis
Abstract: In the paper I examine the trade-offs between internal and external balance and the role of macroeconomic policy in Greece. I estimate and test versions of the two principal open economy macromodels: the imperfect-substitutes, one-sector model, and the two-sector model with nontraded goods. Both are real general equilibrium models that highlight the pivotal role of wage and price setting for the determination of output, competitiveness and external balance. The results are unfavorable to the better-known imperfect-substitutes model, which is used more widely as the basis for modeling aggregate fluctuations in the main industrial economies.
Keywords: macroeconomic policy; balance of payments; exchange rates
JEL Codes: 131431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external demand (J23) | domestic production (D20) |
| government expenditure (H59) | demand for non-traded goods (R22) |
| demand for non-traded goods (R22) | output (C67) |
| output (C67) | recession (E32) |
| real exchange rate (F31) | output (C67) |
| real exchange rate (F31) | inflation (E31) |
| fiscal expansion (E62) | output (C67) |
| fiscal expansion (E62) | unemployment (J64) |
| fiscal expansion (E62) | inflation (E31) |
| fiscal expansion (E62) | current account (F32) |