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Currency crisis and collapse in interwar Greece: predicament or policy failure?

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  • Christodoulakis, Nicos

Abstract

Greece in 1928 viewed the anchoring to the Gold Exchange Standard as the imperative choice of the time in order to implant financial credibility and carry over an ambitious plan of reforms to modernise the economy. But after the pound sterling exited the system in 1931, Greece, instead of following suit, chose a defence that drove interest rates at high levels, squeezed the real economy and exhausted foreign reserves. Unable to borrow from abroad, it quitted the system in 1932 and the Drachma was heavily devalued. Despite a rise in competitiveness, the erosion of real incomes cut domestic demand, unemployment continued to rise and the country entered a period of acute social and political instability. The lessons are perhaps relevant today for the costs that Greece would face by exiting the Eurozone. A model of Balance of Payments crises with partial capital controls is employed to analyze the response of currency pegs to external shocks and examine under which circumstances the regime collapses. Its main predictions are found to be in agreement with the actual outcomes in 1932.

Suggested Citation

  • Christodoulakis, Nicos, 2012. "Currency crisis and collapse in interwar Greece: predicament or policy failure?," LSE Research Online Documents on Economics 44881, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:44881
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    File URL: http://eprints.lse.ac.uk/44881/
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    References listed on IDEAS

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    1. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
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    Cited by:

    1. Emmanuel Mamatzakis, 2013. "Are there any Animal Spirits behind the Scenes of the Euro area Sovereign Debt Crisis?," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 72, Hellenic Observatory, LSE.
    2. Yannis Valinakis, 2012. "Greece’s European Policy Making," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 63, Hellenic Observatory, LSE.
    3. Manussos Marangudakis & Kostas Rontos & Maria Xenitidou, 2013. "State Crisis and Civil Consciousness in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 77, Hellenic Observatory, LSE.
    4. Spyros Kosmidis, 2013. "Government Constraints and Economic Voting in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 70, Hellenic Observatory, LSE.
    5. Athanasia Chalari & Clive Sealey & Mike Webb, 2016. "A Comparison of Subjective Experiences and Responses to Austerity of UK and Greek Youth," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 102, Hellenic Observatory, LSE.
    6. Jordaan, Jacob A. & Monastiriotis, Vassilis, 2016. "The domestic productivity effects of FDI in Greece: loca(lisa)tion matters!," LSE Research Online Documents on Economics 68816, London School of Economics and Political Science, LSE Library.
    7. Stavros B. Thomadakis, 2015. "Growth, Debt and Sovereignty: Prolegomena to the Greek Crisis," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 91, Hellenic Observatory, LSE.
    8. Nicholas APERGIS & Arusha COORAY, 2013. "New Evidence on the Remedies of the Greek Sovereign Debt Problem," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 79, Hellenic Observatory, LSE.
    9. Helen Caraveli & Efthymios G. Tsionas, 2012. "Economic Restructuring, Crises and the Regions: The Political Economy of Regional Inequalities in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 61, Hellenic Observatory, LSE.
    10. Nick Papandreou, 2014. "Life in the First Person and the Art of Political Storytelling:The Rhetoric of Andreas Papandreou," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 85, Hellenic Observatory, LSE.
    11. Yiannos Katsourides, 2013. "Political Parties and Trade Unions in Cyprus," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 74, Hellenic Observatory, LSE.
    12. George Alogoskoufis, 2013. "Macroeconomics and Politics in the Accumulation of Greece’s Debt: An econometric investigation, 1975-2009," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 68, Hellenic Observatory, LSE.
    13. Vassilis Monastiriotis & Angelo Martelli, 2013. "Beyond Rising Unemployment: Unemployment Risk, Crisis and Regional Adjustments in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 80, Hellenic Observatory, LSE.
    14. Rosa VAsilaki, 2016. "Policing the crisis in Greece: The others' side of the story," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 98, Hellenic Observatory, LSE.
    15. Chalari, Athanasia & Sealey, Clive & Webb, Mike, 2016. "A comparison of subjective experiencesand responses to austerity of UK andGreek youth," LSE Research Online Documents on Economics 68585, London School of Economics and Political Science, LSE Library.
    16. Kostas Ifantis, 2013. "The US and Turkey in the fog of Regional Uncertainty," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 73, Hellenic Observatory, LSE.
    17. Kougias, Konstantinos, 2017. "‘Real’ flexicurity worlds in action: evidence from Denmark and Greece," LSE Research Online Documents on Economics 69576, London School of Economics and Political Science, LSE Library.
    18. Kosmidis, Spyros, 2013. "Government constraints and economic voting in Greece," LSE Research Online Documents on Economics 50259, London School of Economics and Political Science, LSE Library.
    19. Nicos Christodoulakis, 2014. "The Conflict Trap in the Greek Civil War 1946-1949: An economic approach," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 83, Hellenic Observatory, LSE.
    20. Konstantinos Kougias, 2017. "‘Real’ Flexicurity Worlds in action: Evidence from Denmark and Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 106, Hellenic Observatory, LSE.
    21. Stavros Thomadakis, Dimitrios Gounopoulos, Christos Nounis and Michalis Riginos, 2014. "Financial Innovation and Growth: Listings and IPOs from 1880 to World War II in the Athens Stock Exchange," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 86, Hellenic Observatory, LSE.

    More about this item

    Keywords

    Gold Exchange Standard; reserves; exchange rate;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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