The Distributional Consequences of the Stabilization and Adjustment Policies in Greece During the Crisis, with the Use of a Multisectoral Computable General Equilibrium Model

Abstract

The paper investigates quantitatively the economic implications of the various stabilization and adjustment policies, adopted by the Greek government in the period 2008-2013, to deal with the unsustainable public finances. To this end a static computable general equilibrium model is presented, that is capable of simulating the main macroeconomic and especially distributional aspects of the Greek crisis that has afflicted the country since 2008. The model is designed to explore in a comparative static manner the outcomes of different policies, and has considerable sectoral and distributional detail. The model is fitted to a 2004 social accounting matrix that includes much detail about the relevant economic actors. Policy simulations are made under a closure rule that seems to fit the Greek economy during the crisis. Simulations of the large shocks that have affected Greece between 2008-2013 indicate that the model reproduces the main outcomes of the economy during the implementation of the policy package adopted during the crisis, and indicates that the package adopted has been very regressive. The policy simulations suggest that the mixture of policies adopted during the stabilization programme by the Greek government has resulted in a large GDP decrease, a large employment decline, and as a painful consequence, a substantial decrease in the public sector deficit, but at the cost of very large decreases in private real incomes and an even larger increase in income inequality. It remains to be seen whether there can be other policy packages that can achieve similar public sector deficit reductions without the adverse income and distributional implications