Bank Of Greece Sa · ATHEX:TELL
Bank Of Greece Sa — Technical Presentation (July 2016)
26 slides from Bank Of Greece Sa's technical presentation, July 2016
Slide 1: The Analytics of the Greek Crisis
The Analytics of the Greek Crisis Gourinchas, Philippon, Vayanos Berkeley, NYU, LSE, NBER & CEPR July 2016, Bank of Greece
Slide 2: The Greek Depression
The Greek Depression • In 2007, Greek GDP per capita was around $35,000 and the unemployment rate was 8.4%. • In 2014, Greek GDP per capita was around $25,000 and the unemployment rate was 26.6% • What happened?
Slide 3: Outline
Outline • Empirical investigation: Was Greece really that bad? • Yes • Much worse than emerging market sudden stops • Even for ‘strict peggers’ • Model-Based investigation: Why? • Because Greece caught an EM disease with AE leverage ratios • What would have helped? • Less leverage • Banking union •
Slide 4: GDP Relative to All Sudden Stops
GDP Relative to All Sudden Stops
Slide 5: Compared to EM Floaters & Peggers
Compared to EM Floaters & Peggers
Slide 6: Endogenous Peg?
20 10 -10 -20 -30 Endogenous Peg? Output per capita relative to t-2, EME sudden stops (log points) t-2 t-1 —strict peggers Trough (t) ~*-Estonia (2009) t+1 t+2 ~®-Latvia (2009) t+3 t+4 ~®-Greece (2010)
Slide 7: Sovereign Default? Credit Bust?... Trifecta
Sovereign Default? Credit Bust?... Trifecta
Slide 8: Investment/Output relative to t-2 (100-log points)
20 -20 -100 1/Y Investment/Output relative to t-2 (100-log points) t-2 tl Trough (t) t+1 t+2 t+3 t+4 —Sudden Stop -®Greece (2010)
Slide 9: Model
Model • SOE in a currency union (r , π F ) • Standard NK DSGE • Government • Banks • Households (B, C ) • Firms (I , K ) • Various shocks ζt# = ρ # ζt−1 # + σ # εt#
Slide 10: Government
Government • Budget constraint g Btg Bt−1 + τt Y t = G t + T t + H Rtg Πt • Fiscal rule (spending and social transfers) gt = Fl gt−1 − Fn nt − Fr rtg − Fb b gt + ζtspend • Tax rate τt = τ̄ + ζttax
Slide 11: Households
Households • Same prefences over consumption and hours worked. Different discount factor (βs > βb ). ! " #1−γ " #1+φ $ ∞ Cit Ni E 0 ∑ βit − t t=0 1−γ 1+ϕ • Borrowers (mass χ ) PH,t Bth % & Pt Cbt = (1 − τt ) Wt Nb,t + h − 1 − d h t h PH,t−1 Bt−1 + PH,t Ttb Rt Bth ≤ B̄th • Savers (mass 1 − χ ) Pt Cst
Slide 12: Non-Financial Firms
Non-Financial Firms • For simplicity, break down into capital- and goods-producing firms. • Capital-producing firms: • Convert consumption goods into capital, and rent to goods-producing firms. • Q rule for investment. • Goods-producing firms: • Convert capital and labor into goods. • Cobb-Douglas w
Slide 13: Price and Wage Rigidity
Price and Wage Rigidity • Phillips curve for wages πtw = β Et πt+1 w − λ w (wt − γ ct − ϕ nt ) + ζtw • Phillips curve for prices πh,t = λp mct + β Et πh,t+1 + ζtπ h , where mct is log marginal cost.
Slide 14: Banks
Banks • Lend to households and firms. • Subject to capital requirement Btk Bth ' ( Vt ≥ κ + Rtk Rth where Vt is franchise value.
Slide 15: Funding Costs
Funding Costs • Key equations • Banks fund households and firms rtk = rtd • Banks: sudden stop and capital loss rtd = rt + ζtr + ξ d LEt dtp+1 ) * dtp = −d¯y yt + d¯b bt−1 + ζtdef • Government rtg = rt + dtg Bg % g + , & dtg = d¯g bt − Et [yt +1 ] − Et πth+1 + ζtdg Y
Slide 16: Doom Loops
Doom Loops • Sovereign risk shock ζtdg : • Government funding costs increase → Government raises taxes and reduces expenditure → Output declines → Expected costs of default on private-sector loans increase → Funding costs for private sector increase and investment drops. • Sudden stop ζtr : • Fundin
Slide 17: Data Inputs
Data Inputs Govt. Revenue Govt. Spending Govt. Yield Private Funding Cost 0.3 0.03 0.1 0.15 0.2 0.05 0.02 0.1 0.1 0 0.01 -0.05 0 0.05 -0.1 0 -0.1 0 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 201 NPL/Total Loans (Obs.) dlog GDP Deflator (Obs.) Household Debt Wage Infla
Slide 18: Fit of the Model
Fit of the Model Output Investment 0 0.1 -0.2 0 -0.4 -0.1 -0.6 2000 2005 2010 2015 2000 2005 2010 2015 PPI Inflation Current Account/GDP 0.02 0 0 -0.02 -0.05 Data -0.04 Model -0.1 -0.06 2000 2005 2010 2015 2000 2005 2010 2015 Wage Inflation 0.02 0 -0.02 -0.04 Data -0.06 Model 2000 2005 2010 2015
Slide 19: Decomposition of Output
Decomposition of Output GDP 0.2 0.15 0.1 Spending Tax 0.05 Credit Demand 0 Sudden Stop Priv. Def. -0.05 Sov. Risk Markup -0.1 Wage Markup -0.15 -0.2 2000 2005 2010 2015
Slide 20: Decomposition of Investment
Decomposition of Investment Investment 0.6 0.4 0.2 Spending 0 Tax Credit Demand -0.2 Sudden Stop Priv. Def. -0.4 Sov. Risk Markup -0.6 Wage Markup -0.8 -1 2000 2005 2010 2015
Slide 21: Counterfactual I: EME Leverage
Counterfactual I: EME Leverage Greece Typical EME Min Max Credit / GDP 0.81 0.46 0.025 1.46 Sovereign Debt / GDP 1.08 0.35 0.063 0.68 Current Account -0.12 -0.04 -0.10 +0.17 Table: Leverage and Imbalances Before Sudden Stop Notes: Average from t-6 to t-2 where t is sudden stop.
Slide 22: Counterfactual I: EME Leverage
Counterfactual I: EME Leverage GDP Investment 0.15 0 0.1 0.05 -0.2 0 -0.05 -0.4 -0.1 Data -0.6 CFact -0.15 Model 2000 2005 2010 2015 2000 2005 2010 2015 Current Account/GDP Govt. Spending 0.3 0.04 0.02 0.2 0 -0.02 0.1 -0.04 0 -0.06 -0.08 -0.1 2000 2005 2010 2015 2000 2005 2010 2015
Slide 23: Counterfactual II: Banking Union
Counterfactual II: Banking Union GDP Investment 0.15 0.2 0.1 0 0.05 0 -0.2 -0.05 -0.4 -0.1 Data -0.6 CFact -0.15 Model 2000 2005 2010 2015 2000 2005 2010 2015 Current Account/GDP Govt. Spending 0.3 0.04 0.02 0.2 0 -0.02 0.1 -0.04 0 -0.06 -0.08 -0.1 2000 2005 2010 2015 2000 2005 2010 2015
Slide 24: Counterfactual III: No Discretionary Spending
Counterfactual III: No Discretionary Spending GDP Investment 0.15 0 0.1 0.05 -0.2 0 -0.4 -0.05 -0.1 Data -0.6 CFact -0.15 Model 2000 2005 2010 2015 2000 2005 2010 2015 Current Account/GDP Govt. Spending 0.3 0.04 0.02 0.2 0 -0.02 0.1 -0.04 0 -0.06 -0.08 -0.1 2000 2005 2010 2015 2000 2005 2010 2015
Slide 25: Counterfactual V: Low Price Stickiness
Counterfactual V: Low Price Stickiness GDP Investment 0.15 0 0.1 0.05 -0.2 0 -0.4 -0.05 -0.1 Data -0.6 CFact -0.15 Model 2000 2005 2010 2015 2000 2005 2010 2015 Current Account/GDP Govt. Spending 0.3 0.05 0.2 0 0.1 0 -0.05 -0.1 2000 2005 2010 2015 2000 2005 2010 2015
Slide 26: Conclusion: What Would Have Helped?
Conclusion: What Would Have Helped? • What we can say • Exposure Y+10%, I+15% • Banking union Y+10%, I+30% • Sound fiscal Y+15%, I+20% • More flexible prices Y+15%, I+20% • Open issues • Early sovereign default? • Devaluation?