The Macroeconomics of the Greek Depression

86 Pages Posted: 5 Jun 2019

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: May 2019

Abstract

The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment away from taxes toward spending or away from capital taxes toward other taxes would generate longer-term production and consumption gains. Eliminating the rise in transfers to households during the boom would significantly reduce the burden of tax adjustment in the bust and the magnitude of the depression.

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Suggested Citation

Chodorow-Reich, Gabriel and Karabarbounis, Loukas and Kekre, Rohan, The Macroeconomics of the Greek Depression (May 2019). NBER Working Paper No. w25900. Available at SSRN: https://ssrn.com/abstract=3398070

Gabriel Chodorow-Reich (Contact Author)

Harvard University Department of Economics ( email )

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Loukas Karabarbounis

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Rohan Kekre

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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