Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area

Yu-Fu Chen (Lead / Corresponding author), Michael Funke

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    Abstract

    Against the backdrop of the Greek three-act tragedy, we present a theoretical
    framework for studying Greece’s recent debt and currency crisis. The model is built on two essential blocks: first, erratic macroeconomic policymaking in Greece is described using a stochastic regime-switching model; second, the euro area governments’ responses to uncertain macroeconomic policies in Greece are considered. The model’s mechanism and assumptions allow either for a Grexit from the euro area or, conversely, the avoidance of Greece’s default against its creditors. The model also offers useful guidance to understand key drivers of the long-winded negotiations between the Greek government and the “institutions”.
    Original languageEnglish
    Pages (from-to)297-318
    Number of pages22
    JournalOpen Economies Review
    Volume28
    Issue number2
    Early online date9 Nov 2016
    DOIs
    Publication statusPublished - Apr 2017

    Keywords

    • Greece
    • Sudden stop
    • Euro
    • Financial assistance programme

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