Deposit Flight and Capital Controls: A Tale from Greece

Romanos Priftis

No 822, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption whilst reallocating it towards formal goods. As evidenced by the data capital controls mitigate the deposit ight and reinforce the switch of consumption to formality.

Keywords: Capital controls; small open economy; exit from a currency union; cash; informal economy; financial intermediaries; Greece (search for similar items in EconPapers)
JEL-codes: E2 E4 F41 G11 G28 (search for similar items in EconPapers)
Date: 2017-01-25
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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