The Macroeconomics of the Greek Depression

113 Pages Posted: 24 May 2019 Last revised: 18 Jun 2021

See all articles by Gabriel Chodorow-Reich

Gabriel Chodorow-Reich

Harvard University Department of Economics

Loukas Karabarbounis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Rohan Kekre

University of Chicago - Booth School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: June 18, 2021

Abstract

The Greek economy experienced a boom until 2007, followed by a decade-long collapse with magnitude and persistence that have no precedent among modern developed economies. We assess quantitatively the sources of the boom and bust and the role of policies in an estimated dynamic general equilibrium model with heterogeneous households and multiple production, banking, government, and external sectors. Demand from the rest of the world and the government fueled the boom in production, whereas realized and anticipated transfers fueled the boom in consumption. Contractionary tax policies, amplified by a decline in factor utilization and  financial frictions, account for the largest fraction of the bust in production, whereas the rise of uninsurable idiosyncratic risk accounts for the largest fraction of the bust in consumption, decline in prices, and the sudden stop of capital  flows. Fiscal policy amplified the depression by concentrating the burden of adjustment on taxes instead of spending and by raising the fraction of taxes that  rms prepay before revenues are realized. By contrast, equity injections to banks mitigated the depression by lowering the cost of borrowing.

JEL Classification: E20, E32, E44, E62, F41

Suggested Citation

Chodorow-Reich, Gabriel and Karabarbounis, Loukas and Kekre, Rohan, The Macroeconomics of the Greek Depression (June 18, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-78, Available at SSRN: https://ssrn.com/abstract=3393089 or http://dx.doi.org/10.2139/ssrn.3393089

Gabriel Chodorow-Reich

Harvard University Department of Economics ( email )

Littauer Center
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HOME PAGE: http://scholar.harvard.edu/chodorow-reich

Loukas Karabarbounis

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rohan Kekre (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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