Applied economic policy with a quadratic criterion function.

Quantitative economic policy models aim at social welfare maximization. Their basic ingredients are an objective function and a constrained structure.[1] The former reflects preferences of decision makers and is well-known as a social preference function. The latter consists of an econometric model and a set of boundary conditions on the arguments of the preference function and/or the econometric model. It is the task of economic advisors to estimate (specify) the constrained structure and optimize the preference function subject to it. Upon completion of their job, economists submit their findings to policy makers for further action.
The present paper belongs to this category of policy models and follows the works of Fox et al. (1966), HANSEN (1967), THEIL (1964), and TINBERGEN (1965). The empirical analysis is concerned with the case of Greece because of the author's acquaintance with issues pertaining to limitations, priorities and in general the functioning of that economy.
Economic policy makers in underdeveloped and/or developing economies in general, and in Greece in particular, are confronted with a serious obstacle: the so-called degrees-of-freedom problem. In brief, given the development stage of the economy and the administrative difficulties associated with it, the number of variables directly controlled by policy makers falls short of the number of targets to be fulfilled. Consequently, instead of requiring the targets to be reached exactly, as in the fixed targets case, decision makers may have to be satisfied to have them achieved as near as possible. [ABSTRACT FROM AUTHOR]