The Macroeconomics of the Greek Depression

82 Pages Posted: 11 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 develop and 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 from taxes toward spending or from capital taxes toward other taxes would generate significant longer-term production and consumption gains.

Keywords: Fiscal policy, Greek Depression, Nominal Rigidity, productivity, taxes

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

Suggested Citation

Chodorow-Reich, Gabriel and Karabarbounis, Loukas and Kekre, Rohan, The Macroeconomics of the Greek Depression (May 2019). CEPR Discussion Paper No. DP13762. Available at SSRN: https://ssrn.com/abstract=3401849

Gabriel Chodorow-Reich (Contact Author)

Harvard University Department of Economics ( email )

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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

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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