Macroeconomic policy and aggregate fluctuations in a semi-industrialized open economy: Greece 1951–1980

In this paper we model the effects of macroeconomic policy in a semi-industrialized open economy. Greece is our case, but the model could apply to other similar economies with tightly controlled financial markets and comprehensive foreign exchange restrictions, where both the exchange rate and interest rates are administered prices. The model consists of three equations which determine output, the price level and the trade balance. It is largely non-Keynesian, but, through the real exchange rate, it allows for anticipated monetary policy to affect real output. The model is estimated by FIML and its various restrictions cannot be rejected. A policy simulation suggests that even Friedman's x% money growth rule would ensure greater macroeconomic stability in the 1970s than the monetary policy that was actually followed.