A disequilibrium model for a small open economy.
This study is mainly concerned with the developmen~ of
a disequilibrium model for a small open economy and its application
to the Greek manufacturing sector over the period 1962-
1982 using quarterly data.
The economy defined comprises two sets of agents: firms
and households, operating in two markets: goods and labour.
Firms, which are profit maximizers, produce a non-storable
good and demand labour while consumers, which are utility maximizers,
demand goods and supply labour. Prices (and wages)
are considered fixed in the short run and agents perceive
quantity constraints. Taking into account the spill-over effects
from the one market to the other, one can determine the
appropriate effective demand functions for employment and imports.
In the present case, the economy will alternatively
belong to three different unemployment regimes; namely the
classical, the keynesian and the repressed inflation. Actual
output and exports which are endogenous in this model, are
given by the production function and the foreign demand for
the domestic product, respectively. However, actual employment
is determined by the minimum of notional (Walrasian)
demand for labour, effective demand for labour and the supply
of labour, while actual imports are conditional to the regime
ciassification obtained in the labour market.
The equations of the model appropriately extended to reflect
the dynamics and the specific characteristics of the
Greek manufacturing sector were estimated by both least squares
and maximum likelihood methods. Specifically, the former
was applied to t~e production, imports and ex?orts functions,
whil~ the'latter to the employment function. The construc-·
tion of several time-series and the use of quarterly data for
a period of 23 years made it possible to exploit the shortrun
properties of the model. .
It is found that this approach produces theoretically
acceptable and plausible results.