Abstract for: Macroeconomic Dynamics of Greece in the Midst of the Eurozone Crisis – Application of SD Modeling and Insights for Policy
This paper examines the effectiveness of and alternatives for the economic policy measures taken after 2008 to tackle the debt crisis in Greece. It also investigates the general value in using system dynamics modeling in policymaking to better understand macroeconomic dynamics. The analysis is based on constructing a system dynamics model of the Greek economy, simulating the model under different scenarios and testing its robustness. The paper concludes that the austerity measures implemented in Greece should have been cancelled or postponed to effectively ease unemployment, facilitate economic growth and cut budget deficits within 5–7 years from the beginning of the crisis. Moreover, the analysis discovers that aggressive debt write-offs have a significant role in alleviating the Greek debt load. In the actual case of excessive political barriers to revoking public spending cuts, a prominent alternative solution would have been to accompany the mandatory cuts with a tap program in which Greek government bond yields are fixed to a specific, sufficiently low level by the European Central Bank. An efficient long-term solution, drawn from the insights of the paper, would be likely to require large-scale institutional reforms in the eurozone.