Real and financial linkages in the Greek economy : a econometric investigation

Makrydakis, Stelios Vasiliou (1992) Real and financial linkages in the Greek economy : a econometric investigation. University of Southampton, Doctoral Thesis.

Abstract

The principle objective of this study is the development of a small-scale macroeconomic model capable of identifying and quantifying the main channels of interaction between the real and financial sectors of the Greek economy. The proposed model attempts to provide a comprehensive account of the credit creation process, while allowing for the significance of the role of wealth as a determinant of the non-bank public's portfolio and spending decisions to be assessed. As a byproduct, a formal test on the relevance of the wealth related issue of government debt neutrality is also undertaken. The empirical analysis is carried out within a dynamic framework using quarterly seasonally unadjusted data from 1966(I) to 1986(IV), and deploying a sequential model selection procedure at the estimation stage. The resultant econometric model satisfies a wide range of diagnostic statistics and describes the associated data-generating process adequately. More importantly, the long-run validity of the economic theory upon which the model is founded is established by thorough cointegration testing. The results obtained suggest that the volume of credit forms the principle linkage through which developments in the financial sector impinge upon real economic activity, with net financial wealth constituting a significant, yet secondary, channel of transmission. Finally, the extreme Ricardian view of public sector debt being neutral with regard to its effect on the real economy has not been substantiated by the data.

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