Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area

Yu-Fu Chen and Michael Funke

Open Economies Review, 2017, vol. 28, issue 2, No 5, 297-318

Abstract: Abstract 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 Greek government and the “institutions”.

Keywords: Greece; Sudden stop; Euro; Financial assistance programmes (search for similar items in EconPapers)
JEL-codes: F34 F45 H63 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Greece's Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area (2015)
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DOI: 10.1007/s11079-016-9421-0

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