Endogenous Growth and External Balance in a Small Open Economy

This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate.

Open Economies Review, (2014), 25, pp. 571-594DOI 10.1007/s11079-013-9290-8

PDF of Accepted Manuscript

Curriculum Vitae (CV)

Portrait GA 044George Alogoskoufis is the Constantine Karamanlis Professor of Hellenic and European Studies, at the Fletcher School of Law and Diplomacy, Tufts University.

He is on leave from the Athens University of Economics and Business, where he has been Professor of Economics since 1990.

He is also a Research Associate of the Hellenic Observatory of the London School of Economics and a Fellow of the European Economic Association.

He was a member of the Hellenic Parliament from September 1996 till October 2009 and served as Greece’s Minister of Economy and Finance from March 2004 till January 2009.

From 1984 to 1992 he served as Lecturer (Assistant Professor) and Reader (Associate Professor) at the University of London (Birkbeck College).

Alogoskoufis holds an MSc (1978) and a PhD (1981) in Economics from the London School of Economics. For his PhD thesis, supervised by George Akerlof, Steve Nickell and Chris Pissarides, he received the Sayers Prize, awarded by the University of London for distinguished doctoral dissertations in monetary economics.

He has published five books and over 40 papers in some of the top international academic journals, including the American Economic Review, the Journal of Political Economy, the Economic Journal, the Journal of Monetary Economics, the European Economic Review, and the Journal of Money, Credit and Banking. His research focuses on unemployment, inflation, exchange rates, the balance of payments, economic growth and monetary and fiscal policy.

In 2002, his book “The Drachma: From the Phoenix to the Euro” (with Sophia Lazaretou), a monetary and economic history of Greece since the 19th century, was awarded the Annual Prize of the Academy of Athens.

In addition to his political and academic posts, Alogoskoufis has served as consultant to a number of international institutions, including the European Commission and the World Bank. He was also a Research Fellow at the Centre for Labour Economics of the London School of Economics and at the London-based Centre for Economic Policy Research. During 1992-1993 he served as Chairman of the Council of Economic Advisors of Greece.

Alogoskoufis was born in Athens in 1955. He is married with three children.

Detailed CV in PDF

Exchange Rate Regimes, Inflation and Credibility: Evidence from Greece

We investigate how exchange rate regimes affect the anti-inflationary credibility of monetary policy in Greece. The evidence suggests a positive impact of a fixed exchange rate regime to anti- inflationary credibility.

(with Philippopoulos A. and V. Vassilatos), in Korres, G.M. and Bitros, G.C. (eds.) Economic integration: Limits and prospects. Palgrave, Houndmills (2002).

This book is intended to provide a basic understanding of current issues and problems of economic integration. Identifying economic integration as one of the main features of modern international economics, the authors examine many aspects and consequences of economic integration which remain obscure and unexplored. After addressing general issues regarding with economic integration, the authors include empirical and theoretical analyses of the monetary union, social policy reform, social union, a public finance, and technological policies.

The Bank of Greece and Inflation: Independence and Democratic Accountability

This paper deals with the question of central bank independence and inflation control, with special reference to the Bank of Greece. After a brief discussion of the history of the Bank of Greece, it surveys current theories of inflation and the literature on the role of the anti-inflationary credibility of monetary policy. It then proceeds to define economic and political independence, with special reference to the problem of inflation and democratic accountability. It concludes that as a result of reforms in the early 1990s the Bank of Greece is already by and large economically independent. However, more needs to be done to make it politically independent as well. The paper suggests the directions of a political initiative to grant political independence to the Bank of Greece.


in Demopoulos G.D., Korliras P.G. and Prodromidis K.P. (eds), Essays in Economic Analysis (in Honor of Professor Theocharis), Athens, Sideris.

Exchange-Rate Regimes, Political Parties and the Inflation-Unemployment Tradeoff: Evidence from Greece

We use Greek data during 1960–1994 to test and estimate a model in which wage inflation, price inflation and unemployment depend on the exchange rate regime, the identity of the political party in power and whether an election is expected to take place. We respect the Lucas critique and take into account the statistical properties of the data. The main results are: (i) The exchange rate regime matters for inflation. After the fall of the Bretton Woods regime in 1972, there is a Barro-Gordon type inflation bias due to the inability of all policymakers to precommit to low inflation. (ii) There are no Barro-Gordon type partisan differences in inflation or unemployment.

Open Economies Review (with Dong-Ho Lee and Apostolis Philippopoulos)

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The Euro, the Dollar and the International Monetary System

In this paper we analyze the changes in the fundamentals of the international monetary system following the introduction of the euro, as well as the likely transition scenario to the new world monetary equilibrium. We suggest that the introduction of the euro will bring about potentially important changes in the international monetary scene, as the euro will substitute to a large extent for the dollar as an international means of payments, unit of account and store of value. Such changes in the fundamentals will bring about an increased demand for euros shortly after the introduction of the new currency in international markets.

The first manifestation of the increased demand for euros will be an appreciation of the new currency against the US dollar and the yen. If the euro does challenge the dollar’s hegemony, this is likely to be a cause of instability in the international monetary system, which appropriate policy coordination could potentially mitigate.


in Paul R. Masson, Thomas H. Krueger and Bart G. Turtelboom (eds), EMU and the International Monetary System, Washington D.C., International Monetary Fund (with Richard Portes).