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

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 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).

On Public Debt Stabilizations in an Interdependent World

This paper considers alternative modes of stabilization of world-wide and relative levels of public debt. The analysis is in terms of a model of overlapping, infinitely lived households. Three methods are compared: tax finance, public- consumption finance and monetary finance. We show that a tax-financed world-wide public-debt stabilization results in the highest reduction in consumption and the capital stock; monetary finance has no real effects in the model examined, other than on the composition of public-sector liabilities between money and bonds. A tax-financed relative public-debt stabilization by one country is shown to be associated with a greater rise in external debt and fall in relative consumption than either of the other methods. Monetary finance is again shown to have no real effects.

in George Alogoskoufis, Tryphon Kollintzas and George Provopoulos (eds), Essays in Honor of Constantine Drakatos, Athens, Papazissis. 

Debts, Deficits and Growth in Interdependent Economies

We investigate the effects of budgetary policies on growth rates, external debt, real interest rates and the stock market valuation of capital in a two-country, overlapping-generations model of endogenous growth. A worldwide rise in the public debt/GDP ratio, or the share of government consumption, reduces savings and growth. They also increase real interest rates and depress the stock market because of the adjustment costs of investment. A relative rise in one country’s debt/GDP ratio or its GDP share of government consumption results in a reduction in its ratio of external assets to GDP. Growth rates are equalized unless there are differences in investment adjustment costs or depreciation rates. Per capita output levels do not necessarily converge.
(with Rick van der Ploeg), in Baldassarri Mario, Massimo Di Matteo and Robert Mundell (eds), International Problems of Economic Interdependence, London, Macmillan (1994).

The ECU, the International Monetary System and the Management of Exchange Rates

This paper examines the prospective implications of full Economic and Monetary Union (EMU) in Europe for the international monetary system. It makes a giant leap forward in trying to compare the status quo, in which nine of the twelve EC currencies participate in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) with full monetary union in which all currencies will have been replaced by a single currency. It concentrates of two main issues: The prospective role of the ECU as an international vehicle and reserve currency, and the implications for the dollar. Second, it examines the prospective changes that EMU will imply for the international coordination of monetary and fiscal policies between the USA, the EC and Japan and the exchange rate regime between the dollar, the ECU and the yen.

in Bekemans Leonce and Tsoukalis Loukas (eds), Europe and Global Economic Interdependence, Bruges, European Interuniversity Press.