The Greek Great Depression: A General Equilibrium Study of its Drivers

Abstract

This paper provides a quantitative study of the main determinants of the Greek great depression since 2010. We use a medium-scale DSGE model calibrated to the Greek economy between 2000 and 2009 (the euphoria years that followed the adoption of the euro). Then, departing from 2010, our simulations show that the fiscal policy mix adopted, jointly with the deterioration in institutional quality and, specifically, in the degree of protection of property rights, can explain essentially all the total loss in GDP between 2010 and 2015 (around 26%). In particular, the fiscal policy mix accounts for 14% of the total output loss, while the deterioration in property rights accounts for another 8%. It thus naturally follows that a less distorting fiscal policy mix and a stronger protection of property rights are necessary conditions for economic recovery in this country.

The Macroeconomics of the Greek Depression

“…5 To generate this comovement, our quantitative model attributes an important role to supply-side influences such as tax rates and supply-side amplification mechanisms such as utilization. Our emphasis on utilization to reconcile movements in output and factor inputs echoes 3 Consistent with both our and the Gourinchas, Philippon, and Vayanos (2016) results, Economides, Philippopoulos, and Papageorgiou (2017) also attribute a substantial role to fiscal consolidation for the bust. Dellas, Malliaropulos, Papageorgiou, and Vourvachaki (2018) highlight the tax side of the fiscal consolidation and the amplification of the decline in measured economic activity by a sizable informal sector.…”

Public Debt Consolidation and its Distributional Effects

“…for the value of skill premium which is consistent with the data. 19 Our 21 We set public debt to GDP ratio in the status quo economy equal to 1 9 The value of the skill premium typically ranges from 1.45 to 1.80 depending on the country, timeframe and method of measurement (for an overview of inequality measures see Krueger et al (2008) while for measurement issues see Crivellaro (2016) and OECD Education at a Glance reports (2008-2018)). For our target value we use OECD's Relative Earnings by educational attainment indicator.…”

“…problem of Rich households is modi…ed as follows. Rich household face similar quadratic transactions costs and thus the laws of motion of physical capital and government bonds for each Rich household changes from equations(6) and(7)to:k R;t+1 = (1 k )k R;t + i R;t R 81) b R;t+1 = b R;t + d R;tR transaction costs and the parameter R ; R 0 measure the size of these transactions costs.The …rst order conditions of Rich households with respect to k R ; b R ; change from equations(19) and(21) in Appendix A.1 to:…”

FIR-GEM: A SOE-DSGE Model for Fiscal Policy Analysis in Ireland

“…Then, each household allocates its members to each sector by maximizing its lifetime utility, for similar modelling see Uribe and Schmitt-Grohe (2017). See Ardagna (2001), Forni, Gerali, and Pisani (2010), Economides, Papageorgiou, Philippopoulos, and Vassilatos (2013) and Papageorgiou (2014), Economides, Papageorgiou, and Philippopoulos (2017) for models which include public employment.…”