Greece's Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat Inside the Single Currency Area
28 Pages Posted: 4 Feb 2016
Date Written: December 23, 2015
Against the backdrop of the Greek three-act tragedy, we present a theoretical framework for studying Greece's recent debt and currency crisis. The model is built on two essential blocks: first, erratic macroeconomic policymaking in Greece is described using a stochastic regime-switching model; second, the euro area governments' responses to uncertain macroeconomic policies in Greece are considered. The model's mechanism and assumptions allow either for a Grexit from the euro area or, conversely, the avoidance of Greece's default against its creditors. The model also offers useful guidance to understand key drivers of the long-winded negotiations between the Syiza government and the euro area governments.
Keywords: Greece, currency crisis, euro, financial assistance programmes
JEL Classification: F340, F450, H630
Suggested Citation: Suggested Citation