The dynamics of Greek public debt – evidence from simultaneous and structural VAR models

Abstract

The goal of the present article was to investigate not only the dynamics of the Greek public debt, but also the appropriate measures required for achieving fiscal consolidation. The empirical estimation is carried out using a macroeconomic data set spanning the period 1980–2008 and both the three-stage least squares (3SLS) methodological approach on a theoretical model and the structural VAR methodology to perform forecast tests and to calibrate the future paths of the public debt variable up to 2020. The results suggest that only a restrictive fiscal policy that simultaneously increases government revenues and reduces government expenditure could permit the country to achieve debt sustainability. The results also suggest that debt sustainability can be achieved faster when tax revenue policies are intensified. The results are expected to have important implications to policymakers for designing effective macroeconomic policy in terms of achieving sustainable levels of public debt.

Keywords:

• primary balance
• public debt
• structural modelling
• Greece

JEL Classification:

• E62
• C51
• C30
• E27

Acknowledgements

The authors wish to thank an anonymous referee and the participants at the Banking, Finance, Money and Institutions: The Post Crisis Era Conference, Surrey, for their valuable comments and suggestions on earlier drafts of the article. Needless to say, the usual disclaimer applies.

Notes

¹ Cecchetti et al. (2011), investigating the impact of debt levels on economic growth in 18 OECD countries from 1980 to 2010, argue that debt levels beyond 85% of GDP are harmful for economic growth.

² Note the same relation would hold if the variables are measured in real terms provided that the rate of inflation is measured using the GDP deflator (Casadio et al., 2012).