Effects of Government Deficits in Greece: Some Theoretical and Empirical Evidence

The purpose of this study is to examine the effects of the fiscal deficit on the Greek economy. The emphasis is on the inflationary, crowding-out and balance of payments problems that have arisen from the deficits in the budget of the Greek government. The study starts with the description of the means through which the fiscal stance can be examined and analyses the virtues and the drawbacks of the traditional and the new measures of fiscal stance. After we describe the characteristics of the Greek monetary system and the structure of the reserve requirements in order to present the relation of the monetary and budgetary policies, we proceed to estimating annual and quarterly measures of fiscal stance for Greece. We then empirically investigate the relationship between private and government investment, which in general is found to be of a complementary character. Furthermore, we deal with the short-run impact of the fiscal deficit on the output, balance of payment and inflation by using quarterly data. Finally, the output and price behaviour were examined under the assumption of rationally formed expectations.