An Empirical Analysis of a Reaction-Function Approach to Policymaking in Greece during 1975-1993

This paper examines the extent to which the policy instruments of money supply and budget deficit were endoigenous in Greece over the period 1975-1993. It is assumed that the policymaker's objectives are the growth rate of GNP and the balance of payments. The so-called "reaction-function approach" to the interdependence of economy and policy is utilised for this purpose. The empirical analysis is made in terms of a maximum likelihood methodology that reconciles co integration with optimal control techniques. It suggests that only the money-supply instrument has been endogenous in an effort to promote growth and prevent balance-of-trade deterioration.