No. 128. A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODEL FOR A SMALL OPEN ECONOMY: GREECE
D. Papageorgiou, A. Kazanas. 2013.
This paper provides an introduction to the dynamic properties of a dynamic stochastic general equilibrium (DSGE) model for a small open economy developed for quantitative policy analysis. The model is calibrated to the Greek economy. Our approach in examining the model’s dynamic properties involves using impulse response functions to a number of domestic and external shocks and analyzing the main transmission mechanisms through which the shocks influence the macroeconomy. The results suggest that reductions in public spending are associated with improvements in fiscal and external imbalances. In terms of output losses, the most desirable ways to reduce fiscal and external imbalances are through cuts in public sector wages, government transfers and public sector employment. In contrast, the most harmful option for reducing fiscal and external imbalances seems to be an increase in labour income taxes.