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

Author

Listed:
  • Yu-Fu Chen

    () (University of Dundee)

  • Michael Funke

    () (Hamburg and CESifo)

Abstract

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 Greek government and the “institutions”.

Suggested Citation

  • Yu-Fu Chen & Michael Funke, 2017. "Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area," Open Economies Review, Springer, vol. 28(2), pages 297-318, April.
  • Handle: RePEc:kap:openec:v:28:y:2017:i:2:d:10.1007_s11079-016-9421-0
    DOI: 10.1007/s11079-016-9421-0
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    Keywords

    Greece; Sudden stop; Euro; Financial assistance programmes;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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