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The Macroeconomics of the Greek Depression

Author

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  • Karabarbounis, Loukas
  • Chodorow-Reich, Gabriel
  • Kekre, Rohan

Abstract

The Greek economy experienced a boom until 2007, followed by a decade-long collapse with magnitude and persistence that have no precedent among modern developed economies. We assess quantitatively the sources of the boom and bust and the role of policies in an estimated dynamic general equilibrium model with heterogeneous households and multiple production, banking, government, and external sectors. Demand from the rest of the world and the government fueled the boom in production, whereas realized and anticipated transfers fueled the boom in consumption. Contractionary tax policies, amplified by a decline in factor utilization and financial frictions, account for the largest fraction of the bust in production, whereas the rise of uninsurable idiosyncratic risk accounts for the largest fraction of the bust in consumption, decline in prices, and the sudden stop of capital flows. Fiscal policy amplified the depression by concentrating the burden of adjustment on taxes instead of spending and by raising the fraction of taxes that firms prepay before revenues are realized. By contrast, equity injections to banks mitigated the depression by lowering the cost of borrowing.

Suggested Citation

  • Karabarbounis, Loukas & Chodorow-Reich, Gabriel & Kekre, Rohan, 2019. "The Macroeconomics of the Greek Depression," CEPR Discussion Papers 13762, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13762
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    Cited by:

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    2. Bertinelli, Luisito & Cardi, Olivier & Restout, Romain, 2022. "Labor market effects of technology shocks biased toward the traded sector," Journal of International Economics, Elsevier, vol. 138(C).
    3. Dimitris Papageorgiou & Stylianos Tsiaras, 2021. "The Greek Great Depression from a neoclassical perspective," Working Papers 286, Bank of Greece.
    4. George Liontos & Konstantinos Mavrigiannakis & Eugenia Vella, 2023. "The Macroeconomics of Skills Mismatch in the Presence of Emigration," DEOS Working Papers 2314, Athens University of Economics and Business.
    5. Mariano Croce & Mohammad R. Jahan-Parvar & Samuel Rosen, 2022. "SONOMA: a Small Open ecoNOmy for MAcrofinance," International Finance Discussion Papers 1349, Board of Governors of the Federal Reserve System (U.S.).
    6. Robert J. Barro & Gordon Y. Liao, 2019. "Tractable Rare Disaster Probability and Options-Pricing," Finance and Economics Discussion Series 2019-073, Board of Governors of the Federal Reserve System (U.S.).
    7. Cardi, Olivier & Restout, Romain, 2023. "Sectoral fiscal multipliers and technology in open economy," Journal of International Economics, Elsevier, vol. 144(C).
    8. Economides, George & Papageorgiou, Dmitris & Philippopoulos, Apostolis, 2020. "Macroeconomic policy lessons from Greece," LSE Research Online Documents on Economics 107155, London School of Economics and Political Science, LSE Library.
    9. Dimakopoulou, Vasiliki & Economides, George & Philippopoulos, Apostolis, 2022. "The ECB's policy, the Recovery Fund and the importance of trust and fiscal corrections: The case of Greece," Economic Modelling, Elsevier, vol. 112(C).
    10. George Economides & Dimitris Papageorgiou & Apostolis Philippopoulos, 2021. "Austerity, Assistance and Institutions: Lessons from the Greek Sovereign Debt Crisis," Open Economies Review, Springer, vol. 32(3), pages 435-478, July.
    11. Tavares, Tiago, 2019. "Labor market distortions under sovereign debt default crises," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    12. Stelios Giannoulakis & Plutarchos Sakellaris, 2023. "Financial crises, firm‐level shocks and large downturns: Evidence from Greece," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1549-1562, April.
    13. Rohan Kekre, 2022. "Optimal Currency Areas with Labor Market Frictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(2), pages 44-95, April.

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    More about this item

    Keywords

    Greek depression; Productivity; Fiscal policy; Financial markets;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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