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Deposit Flight and Capital Controls: A Tale from Greece

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  • Romanos Priftis

Abstract

This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption whilst reallocating it towards formal goods. As evidenced by the data capital controls mitigate the deposit ight and reinforce the switch of consumption to formality.

Suggested Citation

  • Romanos Priftis, 2017. "Deposit Flight and Capital Controls: A Tale from Greece," Economics Series Working Papers 822, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:822
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    Cited by:

    1. Antonis Kotidis & Dimitris Malliaropulos, 2018. "Why exports adjust: missing imported inputs or lack of credit?," Working Papers 251, Bank of Greece.
    2. Demian Macedo & Victor Troster, 2021. "Liquidity shocks and interbank market failures: the role of deposit flights, non-performing loans, and competition," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(4), pages 705-746, October.

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    More about this item

    Keywords

    Capital controls; small open economy; exit from a currency union; cash; informal economy; financial intermediaries; Greece;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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