Discussion Paper

No. 2018-65 | September 13, 2018
The Greek crisis: A story of self-reinforcing feedback mechanisms

Abstract

While there seems to be a well-established consensus about the underlying causes to the Greek crisis, less is known about internal and external transmission mechanisms that ultimately caused unemployment to increase rapidly over this period. Motivated by the structural slumps theory in Phelps (Structural slumps, 1994), the paper attempts, therefore, to uncover the dynamic mechanisms behind prices, interest rates, and external imbalances that contributed to the severity and the length of the crisis. The authors find that the strongly increasing real bond rate and unemployment rate together with a persistently appreciating real exchange rate and a deterioration of competitiveness in the euro-zone have contributed to persistently growing structural imbalances in the Greek economy. As the lack of confidence in the Greek economy grew steadily, the scene was set for a monumental structural slump. Over the crisis period, all variables exhibited self-reinforcing feedback adjustment somewhere in the system except for inflation rate. Unemployment took the burden of adjustment when the bond rate sky rocketed, competitiveness deteriorated, and confidence fell.

Data Set

JEL Classification:

C32, E24, E31, E65

Assessment

  • Downloads: 72

Links

Cite As

Katarina Juselius and Sophia Dimelis (2018). The Greek crisis: A story of self-reinforcing feedback mechanisms. Economics Discussion Papers, No 2018-65, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-65


Comments and Questions


Anonymous - Referee Report 1
September 26, 2018 - 07:53

Report for: “The Greek crisis: A story of self-reinforcing feedback mechanisms”

The study builds on Phelps (1994) to uncover the dynamic mechanisms behind prices, interest rates, and external imbalances of the Greek economy. The authors find that the increasing real bond rate and unemployment rate together with the real ...[more]

... exchange rate and a deterioration of competitiveness zone have contributed to persistently growing structural imbalances in the Greek economy.
Over the crisis period, all variables exhibited self-reinforcing feedback adjustment. Unemployment took most of the adjustment.
The authors employ Greek data and they build a cointegrated VAR framework. The paper is timely, of interest and well written.

Comments
1. This paper provides a very interesting overview of the literature on the Greek crisis. The authors could also extend by considering a few more studies:

Sarafidis, V. Panagiotelis A., Panagiotidis T. (2017) When did it go wrong? In The Greek debt crisis edited by C. Floros and I. Chatziantoniou.

2. Figure 1: is the inflation rate seasonally adjusted?

3. The authors might need to acknowledge that some of the variables of interest are operating at a different frequency (for instance bond rates (or spreads)).

Overall the paper is of high quality.