Must-Read: Pierre-Olivier Gourinchas et al.: The Greek Crisis: An Autopsy

Must-Read: Pierre-Olivier Gourinchas et al.: The Greek Crisis: An Autopsy:

The Greek crisis is one of the worst in history, even in the context of recorded ‘trifecta’ crises – the combination of a sudden stop with output collapse, a sovereign debt crisis, and a lending boom/bust…

This column quantifies the role of each of these factors…. While fiscal consolidation was important in driving the drop in output, it accounted for only for half of that drop. Much of the remainder can be explained by the higher funding costs of the government and private sectors due to the sudden stop. For its sheer intensity and duration, the Greek crisis has been quite unprecedented. One measure says it all – real income per capita declined every single year between 2007 and 2013, a cumulated drop of 26%. Since then, it has barely risen….

Incorporating debt, default, and price stickiness yields rich interactions between the creditworthiness of the government and that of banks, firms, and households…. We decompose the movements in output, investment, and other key macroeconomic variables into the contribution of each type of shock. This helps us determine which shocks were the most important in driving the crisis dynamics. Second, we perform a number of ‘counterfactual exercises’ to identify the role played by different aspects of the institutional environment…