Tax Rates, Government Spending and TFP A Quantitative Assessment of their Role in the Greek Depression: 1979-2001

This paper provides a quantitative assessment of the role of government policy and total factor produc- tivity (TFP) in Greek economic performance during the period 1979-2001. According to Kehoe and Prescott (2002, 2007) this period can be characterized as a Great Depression. Our methodology, based upon the work of Cole and Ohanian (1999) and Kehoe and Prescott (2002, 2007), employes growth accounting and a dynamic general equilibri- um model. We introduce to the neoclassical growth model a government sector with distortionary taxation, and given the exogenous paths of tax rates, government consumption, TFP, and population, we ask whether our model economy can produce growth accounting characteristics which are similar to that in the data. Our results suggest, that our model economy qualitatively matches the path of key macroeconomic variables (real per capita GDP, capi- tal deepening, and labour hours per capita) of the Greek economy for the period 1979-2001. However, quantitati- vely and in terms of timing and turning points, there are subperiods were our artiOcial economy diverges from the data. Furthermore, the presence of distortionary taxation and government spending improves the performance of our model compared to the case of a standard neoclassical setting (see Gogos et al. (2014)). As a result, we conclude that the government sector is important in accounting for Greeceis economic performance over the period 1979-2001.