Vanghelis Vassilatos

Market and Political Power Interactions in Greece: A Theory

In this paper, we develop a neoclassical growth model of market and political power interactions that captures the main features of the economic and political system of Greece and explains the weak economic growth of Greece in the last forty years. The model incorporates the insiders-outsiders labor market structure and the concept of an elite government. Outsiders form a group of workers that supply labor to a competitive private sector. And, insiders form a group of workers that enjoy market power in supplying labor to the public sector and influence the policy decisions of government, including those that affect the development and maintenance of public sector infrastructures. This leads to labor misallocation and inefficient fiscal policies. Thus, even though expanding public sector output has a positive effect on growth, eventually this is counterbalanced by the labor misallocation and inefficient tax policy outcomes leading to a growth reversal phenomenon. The model proposed in this paper may be applicable to other countries that have a similar politicoeconomic structure with Greece, namely other Southern European countries.

Exchange-Rate Regimes, Inflation and Credibility: Evidence from Greece

Recent theories of inflation stress how the limited ability of policy makers to commit themselves to price stability results in high inflation without any employment benefits. This has been shown by Barro and Gordon (1983) in a sequential move game between wage setters and a central bank along the Phillips curve. An important extension of this model is the exchange rate regime model of Giavazzi and Giovannini (1987) and Giavazzi and Pagano (1988). These authors have shown that participation in a regime of exchange rate commitments can give an institutional solution to the inefficient Barro-Gordon outcome.2 In particular, participation in a regime of fixed exchange rates, in which monetary policy is determined by an inflation-averse core country, ties the hands of domestic policy makers. This is reflected in wage-setters’ expectations, and so the domestic economy ends up with the same average inflation as the core country.3