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Currency crisis and collapse in interwar Greece: predicament or policy failure?

Christodoulakis, Nicos (2012) Currency crisis and collapse in interwar Greece: predicament or policy failure? GreeSE papers, 60. London School of Economics and Political Science, Hellenic Observatory, London, UK.

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Abstract

Greece in 1928 viewed the anchoring to the Gold Exchange Standard as the imperative choice of the time in order to implant financial credibility and carry over an ambitious plan of reforms to modernise the economy. But after the pound sterling exited the system in 1931, Greece, instead of following suit, chose a defence that drove interest rates at high levels, squeezed the real economy and exhausted foreign reserves. Unable to borrow from abroad, it quitted the system in 1932 and the Drachma was heavily devalued. Despite a rise in competitiveness, the erosion of real incomes cut domestic demand, unemployment continued to rise and the country entered a period of acute social and political instability. The lessons are perhaps relevant today for the costs that Greece would face by exiting the Eurozone. A model of Balance of Payments crises with partial capital controls is employed to analyze the response of currency pegs to external shocks and examine under which circumstances the regime collapses. Its main predictions are found to be in agreement with the actual outcomes in 1932.

Item Type: Monograph (Working Paper)
Official URL: http://www2.lse.ac.uk/europeanInstitute/research/h...
Additional Information: © 2012 The Authors
Library of Congress subject classification: D History General and Old World > DF Greece
H Social Sciences > HC Economic History and Conditions
Journal of Economic Literature Classification System: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements
N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N14 - Europe: 1913-
N - Economic History > N2 - Financial Markets and Institutions > N24 - Europe: 1913-
Sets: Collections > Economists Online
Research centres and groups > Hellenic Observatory
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 60
Date Deposited: 17 Jul 2012 10:29
URL: http://eprints.lse.ac.uk/44881/

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