INFLATION AND STABILIZATION IN A SMALL OPEN ECONOMY: THE CASE OF GREECE, 1960-1980

Two models are developed and tested with data of the Greek economy for the period 1960-1980. The first theoretical construct adopts a generalized exchange rate regime approach to domestic inflation, the rate of change of the nominal exchange rate and flows of international reserves, within the framework of the monetary approach to the balance of payments. The degree of flexibility of the exchange rate regime is explicitly modelled and estimated for the Greek economy. The second model deals with short run macroeconomic stabilization problems when the economy is continuously disturbed by price shocks which tend to temporarily dislocate the manifestations of inflationary pressure from their long run paths as analyzed in the first model and to destabilize real output from its full-employment level. Monetary accommodation and nominal exchange rate policies are assessed as stabilization tools and their opportunity costs are evaluated with respect to the Greek economy.