The Macroeconomic Effects of Budget Deficits in Greece: A VAR-VECM Approach

International Research Journal of Finance and Economics/Issue 79 (2011)

Posted: 21 May 2012

See all articles by Andreas G. Georgantopoulos

Andreas G. Georgantopoulos

National and Kapodistrian University of Athens; Panteion University of Athens - Panteion University of Political and Social Sciences

Anastasios Tsamis

Panteion University of Athens

Date Written: May 20, 2012

Abstract

This paper investigates the causal links between budget deficit (BD) and other macroeconomic variables such as Consumer Price Index (CPI), Gross Domestic Product (GDP) and Nominal Effective Exchange Rate (NEER) for Greece, during the period 1980-2009. Empirical evidence based on Variance Error Correction Model (VECM) and variance decomposition estimates indicate that the variables under study are cointegrated and that one-way causalities exist running from NEER to BD and from BD to GDP. Moreover, results imply that bidirectional causal links between NEER and CPI exist in the case of Greece while GDP granger-causes CPI. However, this study finds no significant links between budget deficit and inflation in the case of Greece. Therefore, this paper highlights the fact that NEER has a direct impact on Greeceā€™s budget deficit, which is in line with the majority of relevant academic works. So, the Greek government should closely monitor the impact of NEER on the budget deficit of Greece, especially under the severe macroeconomic pressure that the sovereign debt crisis causes on the Greek economy since 2009.

Keywords: Budget Deficits, Nominal Effective Exchange Rates, Cointegration, Vector Error Correction Model, Variance Decomposition

JEL Classification: C54, E31, E43

Suggested Citation

Georgantopoulos, Andreas G. and Tsamis, Anastasios, The Macroeconomic Effects of Budget Deficits in Greece: A VAR-VECM Approach (May 20, 2012). International Research Journal of Finance and Economics/Issue 79 (2011), Available at SSRN: https://ssrn.com/abstract=2063033

Andreas G. Georgantopoulos (Contact Author)

National and Kapodistrian University of Athens ( email )

Greece

Panteion University of Athens - Panteion University of Political and Social Sciences ( email )

136 Sygrou
Athens
Greece

Anastasios Tsamis

Panteion University of Athens ( email )

Athens
Athens 117 45
Greece

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,400
PlumX Metrics