Greece's Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat Inside the Single Currency Area

28 Pages Posted: 4 Feb 2016

See all articles by Yu-Fu Chen

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Michael Funke

University of Hamburg - Department of Economics; Tallinn University of Technology (TUT)

Date Written: December 23, 2015

Abstract

Against the backdrop of the Greek three-act tragedy, we present a theoretical framework for studying Greece's recent debt and currency crisis. The model is built on two essential blocks: first, erratic macroeconomic policymaking in Greece is described using a stochastic regime-switching model; second, the euro area governments' responses to uncertain macroeconomic policies in Greece are considered. The model's mechanism and assumptions allow either for a Grexit from the euro area or, conversely, the avoidance of Greece's default against its creditors. The model also offers useful guidance to understand key drivers of the long-winded negotiations between the Syiza government and the euro area governments.

Keywords: Greece, currency crisis, euro, financial assistance programmes

JEL Classification: F340, F450, H630

Suggested Citation

Chen, Yu-Fu and Funke, Michael, Greece's Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat Inside the Single Currency Area (December 23, 2015). CESifo Working Paper Series No. 5677, Available at SSRN: https://ssrn.com/abstract=2727113

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

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