An Economic Business Cycles Model with Credit Constraints: The Case of Greece

A multiplier/accelerator macroeconomic model incorporating the permanent income hypothesis in private consumption, financial constraints in private investment, and a government that attempts fiscal expansions with tight money, is examined. Stability conditions show that government actions could be destabilizing if consumption patterns are closer to the Keynesian archetype than to the permanent income hypothesis. Simulation exercises show that during the period 1973-90 Greece was closer to the PIH with high marginal propensity to consume and low coefficient of acceleration with respect to aggregate private investment activities.