Working Paper: NBER ID: w25900
Authors: Gabriel Chodorow-Reich; Loukas Karabarbounis; Rohan Kekre
Abstract: Greece experienced a boom until 2007, followed by a collapse of unprecedented magnitude and persistence. We assess the sources of the boom and the bust, using a rich estimated dynamic general equilibrium model. External demand and government consumption fueled the boom in production, whereas transfers fueled the boom in consumption. Different from the standard narrative, wages and prices declined substantially during the bust. Tax policy accounts for the largest fraction of the bust in production, whereas uninsurable risk accounts for the bust in consumption and wages. We assess how the composition of fiscal adjustment and bailouts affected the crisis.
Keywords: Greek depression; macroeconomics; fiscal policy; economic downturn
JEL Codes: E20; E32; E44; E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external demand (J23) | production (L23) |
| government consumption (E20) | production (L23) |
| transfers (F16) | consumption (E21) |
| tax policy (H20) | production (L23) |
| uninsurable risks (G22) | consumption (E21) |
| uninsurable risks (G22) | wages (J31) |
| working capital constraints (D25) | production (L23) |
| fiscal consolidation measures (E62) | economic activity (E20) |
| bank bailout (G28) | economic recovery (E65) |