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GEMF

Grupo de Estudos Monetários e Financeiros

Estudo do GEMF n.º 08/2016

   

The Greek economy under the twin-deficit pressure: a demand orientated growth approach


Elias Soukiazis 1, Micaela Antunes 2 & Ioannis Kostakis 3
1 Faculty of Economics University of Coimbra and GEMF, Portugal
2 Faculty of Economics University of Coimbra and GEMF, Portugal
3 Faculty of Geography, Environment and Applied Economics, Harokopio University, Greece

Abstract:

This paper uses an alternative growth approach in line with Thirlwall´s model in order to predict economic growth in Greece taking into account internal and external imbalances caused by public deficit/debt and lack of trade competitiveness. It is shown that the simple Thirlwall´s Law (given by the product of the ratio of the income elasticities of demand for exports and imports, and the growth of foreign demand) over-predicts real growth in Greece while the more complete extended model, makes a closer prediction which is consistent with the high deficit/debt and current account deficit experienced in this country. The simulation approach shows that the most efficient policy to attain higher growth is to reduce external imbalances while policies to reduce internal imbalances are low growth enhancing.

Keywords: Internal and external imbalances, price and no price competitiveness, equilibrium growth rates, 3SLS system regressions, supply constraints.

JEL classification: C32, E12, H6, O4

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