The Analytics of the Greek Crisis

Transcription

1 The Analytics of the Greek Crisis Gourinchas, Philippon, Vayanos Berkeley, NYU, LSE, NBER & CEPR July 216, Bank of Greece

2 The Greek Depression In 27, Greek GDP per capita was around $35, and the unemployment rate was 8.4%. In 214, Greek GDP per capita was around $25, and the unemployment rate was 26.6% What happened?

3 Outline Empirical investigation: Was Greece really that bad? Yes Much worse than emerging market sudden stops Even for strict peggers Model-Based investigation: Why? Because Greece caught an EM disease with AE leverage ratios What would have helped? Less leverage Banking union Fiscal discipline More flexible prices

4 GDP Relative to All Sudden Stops

5 Compared to EM Floaters & Peggers

6 Endogenous Peg?

7 Sovereign Default? Credit Bust?... Trifecta

8 I/Y

9 Model SOE in a currency union (r,π F ) Standard NK DSGE Government Banks Various shocks Households (B, C) Firms (I,K) ζ # t = ρ # ζ # t 1 + σ # ε # t

10 Government Budget constraint Bt g Rt g + τ t Y t = G t + T t + B g t 1 Π H t Fiscal rule (spending and social transfers) g t = F l g t 1 F n n t F r r g t F b b g t + ζ spend t Tax rate τ t = τ + ζ tax t

11 Households Same prefences over consumption and hours worked. Different discount factor (β s > β b ). Borrowers (mass χ) (( ) C E βi t i 1 γ t t= 1 γ ( ) N i 1+φ ) t 1 + ϕ P t C b t =(1 τ t )W t N b,t + P H,tB h t R h t ( ) 1 dt h P H,t 1 Bt 1 h + P H,t Tt b B h t B h t Savers (mass 1 χ) P t C s t =(1 τ t )W t N s,t + R t P H,t 1 S t 1 P H,t S t + P H,t T s t

12 Non-Financial Firms For simplicity, break down into capital- and goods-producing firms. Capital-producing firms: Convert consumption goods into capital, and rent to goods-producing firms. Qruleforinvestment. Goods-producing firms: Convert capital and labor into goods. Cobb-Douglas with constant TFP. Financing friction: pay part of wage bill in advance.

13 Price and Wage Rigidity Phillips curve for wages π w t = βe t π w t+1 λ w (w t γc t ϕn t )+ζ w t Phillips curve for prices π h,t = λ p mc t + βe t π h,t+1 + ζ πh t, where mc t is log marginal cost.

14 Banks Lend to households and firms. Subject to capital requirement ( B k V t κ t Rt k where V t is franchise value. + B t h ) Rt h

15 Funding Costs Key equations Banks fund households and firms r k t = r d t Banks: sudden stop and capital loss rt d = r t + ζt r + ξ d [ LE t d p ] t+1 dt p = d y y t + d b b t 1 + ζt def Government rt g = r t + dt g dt g = d B g g Y [ ] (bt g E t [y t+1 ] E t π h t+1 ) + ζt dg

16 Doom Loops Sovereign risk shock ζ dg t : Government funding costs increase Government raises taxes and reduces expenditure Output declines Expected costs of default on private-sector loans increase Funding costs for private sector increase and investment drops. Sudden stop ζ r t : Funding costs for private sector increase Output and investment drop Fiscal revenues drop Expected costs of default on sovereign loans increase Government funding costs increase.

17 Data Inputs Govt. Revenue Govt. Spending Govt. Yield Private Funding Cost NPL/Total Loans (Obs.) 1 dlog GDP Deflator (Obs.) Household Debt Wage Inflation (Obs.)

18 Output Fit of the Model Investment PPI Inflation Data Model Wage Inflation Data Model Current Account/GDP

19 Decomposition of Output GDP Spending Tax Credit Demand Sudden Stop Priv. Def. Sov. Risk Markup Wage Markup

20 Decomposition of Investment Investment Spending Tax Credit Demand Sudden Stop Priv. Def. Sov. Risk Markup Wage Markup

21 Counterfactual I: EME Leverage Greece Typical EME Min Max Credit / GDP Sovereign Debt / GDP Current Account Table: Leverage and Imbalances Before Sudden Stop Notes: Average from t-6 to t-2 where t is sudden stop.

22 Counterfactual I: EME Leverage GDP Investment Data CFact Model Current Account/GDP.3 Govt. Spending

23 Counterfactual II: Banking Union GDP Investment Data CFact Model Current Account/GDP.3 Govt. Spending

24 Counterfactual III: No Discretionary Spending GDP Investment Data CFact Model Current Account/GDP.3 Govt. Spending

25 Counterfactual V: Low Price Stickiness GDP Investment Data CFact Model Current Account/GDP.3 Govt. Spending

26 Conclusion: What Would Have Helped? What we can say Exposure Y+1%, I+15% Banking union Y+1%, I+3% Sound fiscal Y+15%, I+2% More flexible prices Y+15%, I+2% Open issues Early sovereign default? Devaluation?