Fiscal policy and the recession: The case of Greece |
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Authors: | Ersi Athanassiou |
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Institution: | 1.Centre for Planning and Economic Research (KEPE),Athens,Greece |
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Abstract: | This paper presents an analysis of the implications of Greece’s intense and long-lasting fiscal and external imbalances for
the potential efficacy of a discretionary fiscal policy response to the current recession. It argues that, given recent developments
in interest rate spreads and the credit markets’ increased sensitivity to risk, the interest rates applicable to the entire
amount of Greece’s external debt would tend to be higher with a fiscal expansion than without one. Moreover, it deduces from
a simple model that the leakages associated with increased interest payments to foreign creditors could well cancel out any
positive multiplier effects generated by a fiscal expansion, resulting in a failure to stimulate growth. The implications
of this finding for policy is that Greece should continue to avoid the adoption of a fiscal stimulus package, not only out
of respect to its fiscal obligations as an EU member but, ultimately, because such a package would be ineffective as an economic
recovery tool. While the analysis focuses on the Greek economy, it may be of relevance to other EU economies suffering from
serious macroeconomic imbalances. |
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Keywords: | |
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