The Lucas conjecture that the business cycle has more or less the same pattern across countries has recently been validated for many OECD countries. Only in the United States, however, have theoretical real-business-cycle (RBC) models managed to account, with one or two exceptions, for the stylized facts of business cycles. Four arguments have been advanced to explain why RBC models have not proved suitable to study the business cycles of other OECD countries: lack of appropriate/reliable data; the need to model most OECD countries as small, open economies; the crucial role of the public sector in many OECD economies; and differences in labour-market behaviour.

In Discussion Paper No. 1518, Tryphon Kollintzas and Vanghelis Vassilatos build an RBC model for Greece that addresses these issues and then examine whether their model can account for the stylized facts of post-war Greece. The authors find that the model does quite well in this respect. They also use the model to examine the response of the Greek economy to various changes in government policy and transfers from abroad. The authors find that increases in the share of government consumption in GDP have adverse effects on output and the productivity of factors of production, and tend to increase foreign asset-holdings. Increases in the GDP share of government investment, however, lead to higher output and total factor productivity, and lower foreign asset-holdings. Thus, the authors find that the increases in the shares of government consumption, foreign transfers and domestic transfers over the last 20 years have acted to reduce the performance of the Greek economy.

A Stochastic Dynamic General Equilibrium Model for Greece
Tryphon Kollintzas and Vanghelis Vassilatos