An econometric model for fiscal policy

Abstract

In this study an attempt is made to develop an econometric model for fiscal policy for Greece. The model explains all government revenues on a consolidated account within a macroeconomic framework. The main purpose is to measure the ef¬fects of government revenues and expenditures on the most important macroeconomic variables. The estimation of such a model is believed to be of great importance for Greece. Firstly, in order to be able to choose the appropriate fiscal policy for correcting a probable disequilibrium in the economy it is necessary to know much about the main characteristics of the economic system as well as the basic effects of the alternative fiscal policies. However, only if accurate forecasts are available it is possible to adopt the appropriate corrective policies. Secondly, the relative importance of the government sector has increased in Greece. The provision of infrastructure and the increase in transfer payments that have been experienced in the last fifteen years, together with similar movements on the revenue side of the budget have considerably influenced the role that is assigned to the government nowadays. However, despite these changes we still do not have a precise idea of the main macroeconomic effects of these policies. Finally, we should take into consideration that the use of quantitative techniques in developing countries is still not very widespread. Thus, despite the various shortcomings of the present model there are still some benefits to be drawn. Macroeconomic models for the Greek economy were constructed in the early 1960's, though these were rather long-term planning models. The model proposed here is specified in such a way that it may be used for evaluating the impact of alternative fiscal policies. Since interest centers on ttors are unavoidable. Another reason for placing more emphasis on the government sector is that the statistical data are believed to be of a better quality than those of other sectors. The construction of a sophisticated model requires a vast amount of information. However, in constructing a model for a developing country one faces the problems of availability and unreliability of the existing data. In many instances measurements for important variables do not exist while in some cases figures provided by the same body and referring to the same concept and year differ considerably from each other.