DP330 | Macroeconomic Policy and the External Constraint in the Dependent Economy: The Case of Greece

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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.