A Stochastic Dynamic General Equilibrium Model for Greece

In this paper we develop a stochastic dynamic general equilibrium model of the Greek economy, in the real business cycle modelling tradition. Household preferences depend on private and public consumption and leisure. Government finances its investment, consumption and transfer payments by means of a proportional income tax rate. Households buy and sell foreign assets in an international capital market and also receive transfer payments from abroad. The volatility, persistence, and co-movement properties of the business cycle component of the data generated by the model are broadly consistent with the actual behaviour of the corresponding actual data of the Greek economy, in 1960–92. We use the model to investigate the response of major macroeconomic variables to temporary and permanent changes in government policy variables, foreign transfers and the rate of return on foreign assets.