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Macroeconomics and politics in the accumulation of Greece’s debt: an econometric investigation, 1975-2009

Alogoskoufis, George (2013) Macroeconomics and politics in the accumulation of Greece’s debt: an econometric investigation, 1975-2009. Hellenic Observatory papers on Greece and Southeast Europe (68). Hellenic Observatory, London School of Economics and Political Science, London, UK.

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Abstract

This paper focuses on an econometric investigation of the macroeconomic and political factors that contributed to Greece’s excessive debt accumulation and its failure to adequately address its fiscal imbalances, from the restoration of democracy in 1974 till the crisis of 2009. The econometric investigation is based on a model in which two political parties alternate in power, and in which governments choose primary expenditure and taxes to minimize deviations from politically determined expenditure and tax targets, subject to a debt accumulation equation. The model predicts a political equilibrium in which primary expenditure and taxes follow feedback rules which go in the direction of stabilizing the debt to GDP ratio. However, this stabilization incentive is weaker in election years. The model also predicts potential partisan differences in the evolution of primary expenditure and taxes, due to the different preferences of political parties. Estimates of government reaction functions to public debt for the period 1975-2009 suggest a rather weak stabilizing reaction of primary deficits to public debt. This stabilizing reaction disappears in election years, which are characterized by strong fiscal expansions. We find no evidence of partisan differences in the reaction of primary deficits to inherited debt, but we do find evidence of lower primary deficits in the post-1992 Maastricht treaty period. Overall the model accounts for the accumulation of Greece’s government debt in terms of the trend increase in primary expenditure, the positive shocks to primary expenditure in election years and the weak stabilizing reaction of government revenue, due to tax smoothing.

Item Type: Monograph (Discussion Paper)
Official URL: http://www2.lse.ac.uk/europeanInstitute/research/h...
Additional Information: © 2013 the Author
Divisions: European Institute
Hellenic Observatory
Subjects: H Social Sciences > HC Economic History and Conditions
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General
N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N14 - Europe: 1913-
Sets: Departments > European Institute
Research centres and groups > Hellenic Observatory
Date Deposited: 15 May 2013 09:09
Last Modified: 10 May 2019 23:21
URI: http://eprints.lse.ac.uk/id/eprint/50257

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