| Abstract : | This thesis is an application for the Greek economy (1979-2001) of the neoclassical great depressions methodology developed by Cole and Ohanian (1999) and Kehoe and Prescott (2002, 2007). As these authors point out: "The general equilibrium growth model is the workhorse of modern economics. It is the accepted paradigm for studying most macroeconomic phenomena, including business cycles, tax policy, monetary policy, and growth. Until recently, however, it has been taboo to use the growth model to study great depressions. This volume breaks that taboo.1 It consists of a collection of papers that use growth accounting and variants of the general equilibrium growth model to examine a number of depressions, both from the interwar period in Europe and North America and from more recent times in Japan and Latin America". According to Kehoe and Prescott (2002) a period is characterized as a great depression if there is a large, rapid and sustained negative deviation of real per capita GDP from trend. The respective quantitative criteria are as follows: 1. It must be a sufficiently large negative deviation (20% or larger). That is, there is some year t in D. 2. The deviation must occur rapidly (with a negative deviation of 15% in the fist decade). That is, there is some year t To + 10 3. The deviation must be sustained, in the sense that real per capita GDP cannot return to trend growth rate for a decade. That is, there are no T00, T0 in D , T00 T0 + 10. The Greek economy during the period 1979-2001 strictly meets these criteria. As Figure 1(a) displays, in 1983, real per capita GDP was already 15% below its 1979 trend growth path (2nd criterion) and in 1987 it further contracted to a 22% level (1st criterion). Furthermore, until 2001 there was no ten year period or more during which real per capita GDP grew at an average rate of 2% (3rd criterion). Hence, the Greek economy for the period 1979-2001 meets all the Kehoe and Prescott (2002, 2007) criteria and we can define this period as a great depression. The methodology we use, i.e., the neoclassical great depressions methodology, is based on two pillars: First, by employing a standard neoclassical production function we perform a growth accounting exercise. There, we decompose real per capita GDP growth rate into three factors. These are the capital factor (capital deepening), the labour factor (labour hours per capita) and the total factor productivity (TFP) factor. Then, we use dynamic general equilibrium models, calibrated to the Greek economy, to identify and quantify the sources (e.g. TFP, tax rates, public consumption, public investment, quality of institutions) of the variations in the factors of production observed in the growth accounting exercise. In Chapter 1, "1979-2001: A Greek Great Depression Through the Lens of Neoclassical Growth Theory", we use as our workhorse the standard neoclassical growth model. We ask whether the observed exogenous path of TFP can account for Greece's economic performance during the period 1979-2001 (1979-1995: crisis phase and 1995-2001: recovery phase, see Figure 1(a)). The answer is affirmative. Changes in TFP are crucial in accounting for the Greek great depression. Our model economy predicts a big decline in economic activity during the 1980s and until the mid-1990s and a strong recovery for the period 1995-2001. This is exactly what happened in Greece. In terms of timing, both with respect to peaks - troughs, as well as the paths as a whole, for most key macroeconomic variables, our model economy moves synchronously with the data. However, puzzles between theory's predictions and the observed data are not missing. For instance, things are (not surprisingly for the neoclassical growth model) less successful when it comes to the labour factor. In Chapter 2, "Tax Rates, Public Spending and TFP - A Quantitative Assessment of their Role in the Greek Depression: 1979-2001", we introduce to the neoclassical growth model a government sector. We do that because as Alogoskoufis (1992, 1995), Dimeli et al. (1997) and Bosworth and Kollintzas (2001) point out, the period 1979-2001 was not only marked by a persistent negative deviation of TFP from its trend growth path, but was also characterized by a continuous increase of the role of the state in the economy. The main question addressed in Chapter 2 is whether the observed exogenous path of tax rates (effective tax rates on private consumption expenditures, labour income and net capital income), public spending (publicconsumption and investment) and TFP can produce growth accounting characteristics whichare similar to those in the data. Our results suggest that our model economy qualitatively matches the path of key macroeconomic variables (real per capita GDP, capital deepening, and labour hours per capita) of the Greek economy for the period 1979-2001. Quantitatively and in terms of timing and turning points, there are still subperiods where our artificial economy does not performs that well. Overall, the presence of distortionary taxation and public spending improves the performance of our model compared to the case of a standard neoclassical setting. Finally, the introduction into our model of public investment and public capital along with constant relative risk aversion (CRRA) preferences leads to a further improvement in our model's ability to match the data. In Chapter 3, "Our Ignorance (TFP) Unfolds: Rent Seeking Activities and Aggregate Economic Performance - The Case of Greece", we employ a dynamic general equilibrium model in order to examine the interrelated role of rent seeking activities, institutions and government policy variables, such as tax rates and public spending, on Greece's economic performance during the period 1979-2001. The model, building on Angelopoulos et al. (2009), is the standard neoclassical growth model, augmented with a government sector and an institutional structure which creates incentives for optimizing agents to engage in rent seeking contests in order to extract rents from the government. This behaviour creates a cost to the economy in the form of an unproductive use of resources. Our main findings are as follows: First, in terms of the path of key macroeconomic variables, our model fits the data quite well. Second, by conducting a growth accounting exercise, we find that during the period 1979-1995 a non negligible proportion of the decline of TFP can be accounted by rent seeking activities. Third, our model produces an index which can be interpreted as a measure of the quality of institutions in the Greek economy. Our model based index exhibits a resemblance with the internal country risk guide (ICRG) index, which is widely used in the literature as a proxy for the quality of a country's institutions. It is worth pointing out that our findings are in line with the concluding remarks of most of the studies in the neoclassical great depressions literature. As Kehoe and Prescott (2002) note: "Collectively, these papers indicate that government policies that affect productivity and hours per working-age person are the crucial determinants of the great depressions of the 20th century".
|
|---|
Copyright © 2013 Library AUEB. All rights reserved.