by Theodore Mariolis
Department of Public Administration, Panteion University, Athens, Greece
E-mail: mariolis@hotmail.gr
Introduction:
It has repeatedly been stated that a Greek exit from the Eurozone will lead to a vicious circle of drachma devaluation, inflation, lack of capital inflows, monetary financing of deficits, and recession. Thus, the application of internal devaluation policies, such as reduction in government expenditures and cuts in unit labour costs in the private sector, seems to be the only available solution to the so-called Greek crisis.
In a recent paper, using simple dynamic input-output price models and data from the most recent (2005) Symmetric Input-Output Table of the Greek economy, it has been estimated that the short-run elasticity of the gross value of domestic production with respect to the nominal exchange rate is no greater than 0.186. Thus, a drachma devaluation of, say, 50% does not imply great inflationary „pressures‟, as is commonly believed; rather it could increase the competitiveness of the economy (as measured by the real exchange rate) by about 37% and decrease the deficit of the balance of goods and services by about 89% (Katsinos and Mariolis, 2012).
1 The purpose of the present paper is to estimate the short-run relationships between currency devaluation, external finance and growth for the Greek economy. In this effort, the basic price model of the aforementioned paper is combined with Thirlwall‟s extended model of balance of payments constrained growth (which includes both capital inflows and interest payments on external debt).2
The remainder of the paper is structured as follows. Section 2 presents the combined model. Section 3 applies the model using the available data of the Greek economy. Section 4 concludes.
In a recent paper, using simple dynamic input-output price models and data from the most recent (2005) Symmetric Input-Output Table of the Greek economy, it has been estimated that the short-run elasticity of the gross value of domestic production with respect to the nominal exchange rate is no greater than 0.186. Thus, a drachma devaluation of, say, 50% does not imply great inflationary „pressures‟, as is commonly believed; rather it could increase the competitiveness of the economy (as measured by the real exchange rate) by about 37% and decrease the deficit of the balance of goods and services by about 89% (Katsinos and Mariolis, 2012).
1 The purpose of the present paper is to estimate the short-run relationships between currency devaluation, external finance and growth for the Greek economy. In this effort, the basic price model of the aforementioned paper is combined with Thirlwall‟s extended model of balance of payments constrained growth (which includes both capital inflows and interest payments on external debt).2
The remainder of the paper is structured as follows. Section 2 presents the combined model. Section 3 applies the model using the available data of the Greek economy. Section 4 concludes.
