An empirical inquiry into the short-run dynamics of output,prices and exchange market pressure

In this paper we develop a short-run disequilibrium model for the interaction of output, prices and exchange-market pressure. In this model we consider the trade-off between movements in exchange rates and movements in international reserves and we also incorporate and test purchasing power parity as a long-run hypothesis. The specification adopted preserves the properties of the monetary approach to exchange rates and the balance of payments in the long run. The theoretical model is applied to the small open economy of Greece for the period 1975–1981.