The State and the Economy of Modern Greece: Key Drivers from 1821 to the Present

This paper reviews, analyses and interprets the history of the state and the economy of modern Greece, from the eve of the war for independence in 1821 to the present. It identifies three major historical cycles, the cycle of state and nation building, 1821-1898, the cycle of national expansion and consolidation, 1899-1949, and the post-1950 cycle of economic and social development. During these two hundred years, Greece managed to almost triple its national territory, to increase its population by almost 15 times and to increase its real GDP per capita by another 15 times. Yet, Greece was also characterized by long periods of low economic growth and political and economic instability, including national ‘schisms’ and civil wars, high inflation, international over-indebtedness, and sovereign debt crises and defaults. The analysis focuses on the key drivers of these developments, exploring the dynamic interactions of ideas and values, economic and social conditions, political and economic institutions, geopolitical circumstances and international economic and financial regimes.

Working Paper no. 4/2023, Department of Economics, Athens University of Economics and Business

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Asymmetries of Financial Openness in an Optimal Growth Model

This paper analyzes international borrowing and lending in an optimal growth model with adjustment costs for investment, under both pre-commitment and non pre-commitment to debt repayment. We study the dynamics of the current account in the transition towards the balanced growth path, and derive the implications of financial openness for both the transition path and the balanced growth path. A comparison with financial autarky reveals that, under pre-commitment, and to the extent that countries start from different initial conditions, financial openness is beneficial for both poor and rich countries, as it allows them to engage in mutually beneficial inter-temporal trade. During the adjustment process, relatively poor countries experience higher consumption and investment compared to autarky, and thus experience current account deficits and accumulate net foreign debt. The inter-temporal tradeoff is asymmetric between poor and ‘rich’ countries, in that poor countries experience lower steady state consumption, due to the need to service their accumulated foreign debt while the opposite happens in relatively rich countries. Under non pre- commitment, this asymmetric inter-temporal tradeoff results in a time inconsistency problem. “Poor” countries reach a point in the adjustment process after which it is welfare improving for them to default on their foreign debt. In the absence of pre-commitment mechanisms, international lenders anticipate these incentives, and international lending and borrowing breaks down. This time inconsistency problem can thus explain both the Feldstein-Horioka puzzle and the Lucas paradox that capital does not flow from rich to poor countries. Credible sanctions in the case of default and ceilings on international borrowing are analyzed as partial solutions to the time-inconsistency problem caused by this asymmetry between poor and ‘rich’ countries.

Working Paper no. 12-2021, Department of Economics, Athens University of Economics and Business

Greece Before and After the Euro: Macroeconomics, Politics and the Quest for Reforms

This paper analyses developments in the Greek economy before and after the euro. The main thesis is that the imbalances that led to the crisis of the post-2010 period were building up during the previous three decades and that their root causes were not merely economic, but social, structural, institutional and political. The fiscal imbalances created in the 1980s were not adequately addressed by the convergence policies of the 1990s, while the long-standing problem of low international competitiveness was further exacerbated by the failure to promote the necessary structural reforms. Greece’s accession to the euro area with major structural and fiscal imbalances and low and deteriorating international competitiveness, led to a steep rise in its external indebtedness. The lopsided adjustment and the inadequacy of the reforms was due to domestic political and social constraints, both before and after euro area entry. In view of the institutional weaknesses of the euro area itself, the external imbalances ultimately led to the external debt crisis of 2010, the imposition of the economic adjustment programs and the ‘great depression’ of the 2010s. The paper also explores the prerequisites for a sustained recovery of the Greek economy within the euro area, once the global economic crisis induced by the coronavirus pandemic is over. The quest for wide ranging reforms remains Greece’s top priority.

Working Paper no. 02-2021, Department of Economics, Athens University of Economics and Business

Historical Cycles of the Greek Economy (from 1821 to the Present)

This paper reviews and interprets the history of the economy of modern Greece, from the eve of the war for independence in 1821 to the present day. It identifies three major historical cycles: First, the cycle of state and nation building, 1821-1898, second, the cycle of national expansion and consolidation, 1899-1949, and, third, the post-1950 cycle of economic and social development. During these two hundred years, the country and the economy have been radically transformed. Compared to the first Greek state, Greece managed to almost triple its national territory, to increase its population by almost 15 times and to increase its real GDP per capita by another 15 times. From the margins of south-eastern Europe, it has moved to the core of today’s European Union.The paper focuses on the main determinants of economic performance during these cycles, with particular emphasis on the role and interactions of social and economic conditions, ideas, institutions and geopolitics. During the first two cycles, the economy underperformed, as state building and the pursuit of the ‘great idea’ were the top national priorities. Despite the early introduction of appropriate economic institutions, fiscal and monetary instability prevailed in the context of a relatively stagnant economy, due to wars, internal conflicts and the international environment. The economy and the welfare state only became a top priority during the third cycle, when a number of domestic and international factors contributed to economic and social development. Greece seems to have largely achieved many of its national goals, having consolidated both its borders and democratic institutions and become a relatively prosperous country in the core of the European union, despite the alternation of triumphs and disasters and the frequent occurrence of wars and internal conflicts, debt crises, ‘defaults’ or economic depressions. Yet many problems remain and the challenge for the future is to focus on reforms that will ensure even higher security and prosperity for the future generations of Greeks.

Working Paper no. 1-2021, Department of Economics, Athens University of Economics and Business.

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GreeSE Paper no. 158, Hellenic Observatory, London School of Economics.

Alternative Monetary Policy Rules in an Imperfectly Competitive Dynamic Stochastic General Equilibrium Model

In this paper we study optimal central bank interest rate policy, and com- pare it to interest rate rules, such as the Wicksell (1898), Fisher (1919) and Taylor (1993) rules, in an imperfectly competitive DSGE model of aggregate fluctuations. We demonstrate that in versions of the model with full price and wage adjustment, or staggered pricing, the optimal policy rule is the Fisher rule of absolute inflation stabilization. We also analyze a version of the model with exogenous inflation shocks, in which the ”divine coincidence” does not apply. In this case, the optimal monetary policy rule takes the form of a Taylor rule, the parameters of which depend on the structural and policy parameters of the model.

Working Paper no. 02-2020, Department of Economics, Athens University of Economics and Business

Economic and Financial Asymmetries in the Euro Area

This paper provides a perspective on the euro area (EA), focusing on macroeconomic and financial asymmetries among its member states and the need for major and fundamental reforms. After surveying the evolution of EU macroeconomic and monetary cooperation and developments since the creation of the euro, and particularly the euro area crisis, we argue that the euro area is in need of fundamental fiscal, financial and labor market reforms. In addition to reforms currently discussed, a common EA budget of moderate size would help smooth out the asymmetric impact of macroeconomic shocks through the operation of automatic fiscal stabilizers. It would also help countries in recession face smaller national fiscal and financial consequences of such recessions, and would also partly address labor market fragmentation as it could be targeted to euro area wide unemployment and health insurance. It would also help in the avoidance of future crises if the scope of the ECB to act as a lender of last resort in times of crisis was expanded and officially recognized.

This paper was presented to the Tufts/LSE Conference on Greece and the Euro: From Crisis to Recovery on April 12, 2019.

George Alogoskoufis and Laurent Jacque, Economic and Financial Asymmetries in the Euro Area, CGK Working Paper no. 2019-02, Fletcher School, Tufts University, (April 2019)

 

 

 

 

Greece and the Euro: A Mundellian Tragedy

This paper analyzes the process of destabilization, crisis and adjustment in the Greek economy since the accession of the country to the European Union and, subsequently, the euro area. It reviews four policy cycles of the past 40 years, the four acts of the Greek tragedy, and discusses alternative ways forward, following the sudden stop and the great depression of the 2010s. It concludes that despite the significant constraints implied by continued participation in the euro area, namely a stark Mundellian conflict between internal and external balance, exiting the euro area risks further destabilizing the economy and bringing about a return of the problems of the 1980s. The current challenge for Greece is to seek to remain and prosper in the euro area. This would require a policy mix based on supply side reforms which would allow for a sustained recovery without the reemergence of external imbalances.

This paper was presented to the Tufts/LSE Conference on Greece and the Euro: From Crisis to Recovery on April 12, 2019.

George Alogoskoufis, Greece and the Euro: A Mundellian Tragedy, CGK Working Paper no. 2019-01, Fletcher School, Tufts University, (April 2019)

George Alogoskoufis, Greece and the Euro: A Mundellian Tragedy, GreeSE Paper no 136, Hellenic Observatory, London School of Economics (May 2019)

 

On the Time Inconsistency of International Borrowing in an Optimal Growth Model

This paper analyzes international borrowing and lending in an optimal growth model with adjustment costs for investment. We study the relation between optimal savings and investment, and the current account, in the transition towards the balanced growth path, and derive the implications of financial openness for both the transition path and the balanced growth path. A comparison with financial autarky reveals that, to the extent that countries start from different initial conditions, and there is pre-commitment to debt repayment, financial openness is beneficial for both “poor” and “rich” countries, as it allows them to engage in mutually beneficial inter-temporal trade. During the adjustment process, relatively “poor” countries experience higher consumption and investment compared to autarky, and thus cumulate current account deficits. There is an inter-temporal tradeoff, in that they experience lower steady state consumption, due to the need to service their accumulated foreign debt. The opposite happens in relatively “rich” countries. The inter-temporal tradeoffs implied by financial openness result in a time inconsistency problem. “Poor” countries reach a point in the adjustment process at which it is welfare improving to renege on their commitment to repay their foreign debt. In the absence of sufficient pre-commitment mechanisms, international lenders anticipate these incentives, and international borrowing and lending are driven to zero. This time inconsistency problem can thus explain both the Feldstein-Horioka puzzle and the Lucas paradox that capital does not flow from “rich” to “poor” countries. Credible sanctions in the case of default and ceilings on international borrowing are analyzed as partial solutions to the time inconsistency problem of international borrowing.

Keywords: time inconsistency, international borrowing, optimal growth, financial openness, debt default
JEL Classification: F43 F34 O11 D91 D92

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The Clash of Central Bankers with Labor Market Insiders, and the Persistence of Unemployment and Inflation in the Main Industrial Economies

This paper analyzes the implications of optimal monetary policy for the dynamic behavior of inflation in a “natural rate” model characterized by endogenous unemployment persistence. We analyze a dynamic “insider outsider” model of the “Phillips Curve”, that accounts for the persistence of unemployment following nominal and real shocks. We derive optimal monetary policy under both discretion and commitment to an inflation target. We demonstrate that under discretion, because of the endogenous persistence of deviations of unemployment from its “natural” rate, deviations of inflation from target display the same degree of persistence as unemployment. Under full commitment to an inflation target there is no inflation persistence. An empirical investigation for the main industrial economies suggests that the persistence of deviations of inflation from a constant inflation target is of the same order of magnitude as the persistence of deviations of unemployment from its “natural” rate. This finding is consistent with the hypothesis put forward in this paper, of a clash between central bankers and labor market insiders, that cause both unemployment and inflation to persist.

Keywords: unemployment persistence, inflation, monetary policy, insiders outsiders, central banks

JEL Classification: E3, E4, E5

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Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve

This paper puts forward an alternative “new Keynesian” dynamic stochastic general equilibrium model of aggregate fluctuations. The model is characterized by one period nominal wage contracts and endogenous persistence of deviations of unemployment from its natural rate. Aggregate fluctuations are analyzed under both a Taylor nominal interest rate rule and under the assumption of optimal discretionary monetary policy. Under both types of monetary policy, the persistence of unemployment results in persistent inflation as the central bank responds to deviations of unemployment from its natural rate. Econometric evidence from the United States since the 1890s cannot reject the main predictions of the model.

Keywords: aggregate fluctuations, unemployment persistence, inflation, monetary policy, insiders outsiders, natural rate
JEL Classification: E3, E4, E5

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