Sources of Output Volatility in Greece

In theoretical and Empirical macroeconomics the dynamic interrelations between economic performance and fiscal and monetary policies is a crusial and controversial one. Different macroeconomic schools of though have provided different explanations for the realtionship among the variables.This paper investigates the real effects on economic activity of fiscal and monetary policies employing quarterly data in Greece over the period 1980-97. To account for influences on real economic performance of technological changes, productivity in manufacturing was added to the model. In the empirical analysis the Johansen maximum likelihood technique is applied to search for a long-run relationship among the macroeconomic variables. The application of vector error-correction models is used to investigate the response of output to fiscal, monetary policies and productivity changes aiming at testing the sources of output variations. The estimation results employing the vector error-correction models indicate that economic performance is a weakly endogenous variable affected mainly by monetary policy and technological progress and to a lesser extent by the fiscal variable. By, contrast, the results imply that the budget deficit did not contribute to short-run deviations in the economic performance. The empirical results have important policy implications, since the adoption of suitable policies would accelerate growth performance, facilitating the real convergence process.