Prospects for the Greek Economy in a Dynamic General Equilibrium Framework

This paper provides a quantitative study of the prospects of the Greek macroeconomy in the medium and long term. The vehicle of analysis is a medium-scale dynamic general equilibrium model calibrated to Greek data. The model includes the main sectors: households, private firms, private banks, the National Central Bank in the Eurosystem and the public sector. We work in three steps. First, we solve the model when policy and other exogenous variables are set as in the most recent data. This solution serves as a departure point for the simulations that follow next. In the second step, we study the transition path of this economy when dynamics are driven by the repayment of the official loans taken from EU institutions since Greece's sovereign debt crisis in the previous decade. Our simulations show that this repayment, other things equal, will have long-lasting recessionary implications and will require systematic primary fiscal surpluses. Third, we search for structural and policy reforms that can mitigate, and hopefully more than offset, these recessionary effects. Following the literature on policy reforms, we change structural parameters and policy variables so as to reduce the gap between Greece and best practice in the EU in key areas. We close with policy takeaways.