The Impact of the Lockdown on the Greek Economy and the Role of the Recovery Fund

George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos

doi:10.1515/bejm-2020-0267

Published by De Gruyter August 2, 2021

The Impact of the Lockdown on the Greek Economy and the Role of the Recovery Fund

George Economides , Apostolis Philippopoulos and Vanghelis Vassilatos

From the journal The B.E. Journal of Macroeconomics

https://doi.org/10.1515/bejm-2020-0267

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Abstract

We develop a microfounded macroeconomic model that embeds the key features of the Greek economy. After calibrating the model to Greek data over 1995–2019, we assume that the economy is initially in the year 2019 and then quantify the adverse economic impact of the lockdown measures taken to control the spread of the pandemic, as well as the implications of the various policy measures (at national and EU level) taken to cushion the impact of the economic hit. We give quantitative answers to questions like: What will be the size and duration of the economic downturn? What are the implications of the national fiscal stimulus? What will be the role of the fiscal transfers coming from the European Recovery Fund? Our results imply that the national fiscal stimulus package adopted so far is helpful but, for the Greek economy to enter an era of sustainable growth, a mix of policies is also needed that combines: (i) a growth-enhancing fiscal mix (ii) product market deregulation (iii) a socially productive use of the resources coming from the Recovery Fund.

Keywords: COVID-19; growth; macroeconomic policy

JEL Classification: O4; H6; E02

Corresponding author: Apostolis Philippopoulos, Athens University of Economics and Business, Athens, Greece; and CESifo, Munich, Germany, E-mail: aphil@aueb.gr

Acknowledgements

We are grateful to the editor and two anonymous referees for constructive criticisms and suggestions. We have benefited from discussions and joint work with K. Angelopoulos, T. Christou, V. Dimakopoulou and P. Kammas. G. Economides and A. Philippopoulos are grateful to the Hellenic Observatory of the LSE for financial support of a project on Economic growth in Greece: Barriers and prospects to which this paper belongs (we specifically acknowledge the support of The A. C. Laskaridis Charitable Foundation (ACLCF), Dr Vassili G. Apostolopoulos and the LSE). Any views and errors are our own.

Appendix A: Macroeconomic System

Collecting all equations, the system that we solve numerically consists of the following equations:

A.1 Households (the Three Types)

(S1) c k , t = ( c k , t h ) ν ( c k , t f ) 1 − ν ν ν ( 1 − ν ) 1 − ν

(S2) μ 2 ( 1 − l k , t − s k , t ) = μ 1 ( 1 − τ t y ) w t k Φ t l ( 1 + τ t c ) Φ t c c k , t

(S3) μ 2 ( 1 − l k , t − s k , t ) = μ 1 ( 1 + τ t c ) Φ t c c k , t × γ Γ k ( s k , t ) γ − 1 ( 1 − PR t ) p t h p t n h Φ t h y i , t h n k Γ k ( s k , t ) γ + n w Γ w ( s w , t ) γ + n b Γ b ( s b , t ) γ

(S4) ( 1 + τ t + 1 c ) Φ t + 1 c c k , t + 1 ( 1 + τ t c ) Φ t c c k , t = β ( 1 + i t + 1 b ) p t p t + 1

(S5) ( 1 + τ t + 1 c ) Φ t + 1 c c k , t + 1 ( 1 + τ t c ) Φ t c c k , t e t p t * p t = ( 1 + τ t + 1 c ) Φ t + 1 c c k , t + 1 ( 1 + τ t c ) Φ t c c k , t e t p t * p t × ψ p e t p t * p t n t k f k , t + λ t g d t p t h p t n h Φ t h y i , t h − f ̄ + β e t + 1 p t + 1 * p t + 1 ( 1 + i t + 1 * ) p t * p t + 1 *

(S6) c k , t h c k , t f = ν ( 1 − ν ) p t f p t h

(S7) c w , t = ( c w , t h ) ν ( c w , t f ) 1 − ν ν ν ( 1 − ν ) 1 − ν

(S8) ( 1 + τ t c ) p t h p t c w , t h + p t f p t c w , t f Φ t c = ( 1 − τ t y ) w t w Φ t l l w , t + g ̄ t t r + Γ w ( s w , t ) γ ( 1 − PR t ) p t h p t n h Φ t h y i , t h n k Γ k ( s k , t ) γ + n w Γ w ( s w , t ) γ + n b Γ b ( s b , t ) γ

(S9) μ 2 ( 1 − l w , t − s w , t ) = μ 1 ( 1 − τ t y ) w t w Φ t l ( 1 + τ t c ) Φ t c c w , t

(S10) μ 2 ( 1 − l w , t − s w , t ) = μ 1 ( 1 + τ t c ) Φ t c c w , t × γ Γ w ( s w , t ) γ − 1 ( 1 − PR t ) p t h p t n h Φ t h y i , t h n k Γ k ( s k , t ) γ + n w Γ w ( s w , t ) γ + n b Γ b ( s b , t ) γ

(S11) c w , t h c w , t f = ν ( 1 − ν ) p t f p t h

(S12) c b , t = ( c b , t h ) ν ( c b , t f ) 1 − ν ν ν ( 1 − ν ) 1 − ν

(S13) ( 1 + τ t c ) p t h p t c b , t h + p t f p t c b , t f Φ t c = ( 1 − τ t y ) w t b Φ t l l b , t + g ̄ t t r + Γ b ( s b , t ) γ ( 1 − PR t ) p t h p t n h Φ t h y i , t h n k Γ k ( s k , t ) γ + n w Γ w ( s w , t ) γ + n b Γ b ( s b , t ) γ

(S14) μ 2 ( 1 − l b , t − s b , t ) = μ 1 ( 1 − τ t y ) w t b Φ t l ( 1 + τ t c ) Φ t c c b , t

(S15) μ 2 ( 1 − l b , t − s b , t ) = μ 1 ( 1 + τ t c ) Φ t c c b , t × γ Γ b ( s b , t ) γ − 1 ( 1 − PR t ) p t h p t n h Φ t h y i , t h n k Γ k ( s k , t ) γ + n w Γ w ( s w , t ) γ + n b Γ b ( s b , t ) γ

(S16) c b , t h c b , t f = ν ( 1 − ν ) p t f p t h

A.2 Price Indexes

(S17) p t = ( p t h ) ν ( p t f ) 1 − ν

(S18) p t f ≡ e t p t h *

A.3 Private Firms in a Symmetric Equilibrium

(S19) y i , t h = A p n g y g , t g n h σ χ p ( k i , t − 1 ) o p + ( 1 − χ p ) ( m i , t f ) o p α o p × A k l i , t k + A w l i , t w 1 − α 1 − σ

(S20) w t k = PR t θ t p t h Φ t h p t ( 1 − σ ) ( 1 − α ) A k y i , t h ( A k l i , t k + A w l i , t w )

(S21) w t w = PR t θ t p t h Φ t h p t ( 1 − σ ) ( 1 − α ) A w y i , t h ( A k l i , t k + A w l i , t w )

(S22) p t h p t 1 + ξ k k i , t k i , t − 1 − 1 = β i , t p t + 1 h p t + 1 1 − δ + ( 1 − τ t + 1 π ) PR t + 1 θ t + 1 Φ t + 1 h r t + 1 k − ξ k 2 k i , t + 1 k i , t − 1 2 + ξ k k i , t + 1 k i , t − 1 k i , t + 1 k i , t

(S23) p t f p t = PR t θ t p t h Φ t h p t ( 1 − σ ) α y i , t h ( 1 − χ p ) ( m i , t f ) o p − 1 χ p ( k i , t − 1 ) o p + ( 1 − χ p ) ( m i , t f ) o p

(S24) k i , t = ( 1 − δ ) k i , t − 1 + x i , t

(S25) π i , t ≡ ( 1 − τ t π ) PR t p t h Φ t h p t y i , t h − w t k l i , t k − w t w l i , t w − p t f p t m i , t f − p t h p t k i , t − ( 1 − δ ) k i , t − 1 − p t h p t ξ k 2 k i , t k i , t − 1 − 1 2 k i , t − 1

where r t + 1 k ≡ ∂ y i , t + 1 h ∂ k i , t = ( 1 − σ ) α y i , t + 1 h χ p ( k k , t ) o p − 1 χ p ( k i , t ) o p + ( 1 − χ p ) ( m i , t + 1 f ) o p , β i , t ≡ β ( 1 + τ t c ) Φ t c c k , t ( 1 + τ t + 1 c ) Φ t + 1 c c k , t + 1 and β i , t + 1 ≡ ( β ) 2 ( 1 + τ t + 1 c ) Φ t + 1 c c k , t + 1 ( 1 + τ t + 2 c ) Φ t + 2 c c k , t + 2 .

A.4 State Firms

(S26) y g , t g = A g χ g ( k g , t − 1 g ) o g + ( 1 − χ g ) ( m g , t g ) o g θ 1 o g ( l g , t ) θ 2 g g , t g 1 − θ 1 − θ 2

(S27) k g , t g = ( 1 − δ g ) k g , t − 1 g + g g , t i

A.5 Government Budget Constraint

(S28) g ̄ t t r + n g w t b l g , t g + p t h p t g g , t g + g g , t i + p t f p t m g , t g + ψ g 2 e t p t * p t n k f k , t + λ t g d t p t h p t n h Φ t h y i , t h − f ̄ 2 p t h p t n h Φ t h y i , t h + ( 1 + i t b ) p t − 1 p t λ t − 1 d d t − 1 + ( 1 + i t b ) p t − 1 * p t * e t p t * p t p t − 1 e t − 1 p t − 1 * λ t − 1 g d t − 1 + ( 1 + i * ) p t − 1 * p t * e t p t * p t p t − 1 e t − 1 p t − 1 * λ t − 1 e u d t − 1 ≡ d t + T t N

where we use n k b k , t = b t d = λ t d d t = ( 1 − λ t g − λ t e u ) d t at each t.

A.6 Gross Domestic Product (GDP) Identity

n k Φ t c c k , t h + n w Φ t c c w , t h + n b Φ t c c b , t h + n h x k , t + n g ( g g , t g + g g , t i ) + c t f *

(S29) + n h ξ k 2 k i , t k i , t − 1 − 1 2 k i , t − 1 = n h Φ t h y i , t h

where c t f * is exports to the rest of the world (defined below).

A.7 Balance of Payments (Economy’s Resource Constraint)

(S30) p t f p t n k Φ t c c k , t f + n w Φ t c c w , t f + n b Φ t c c b , t f + n h m i , t f + n g m g , t g − p t h p t c t f * + ( 1 + i t * ) p t − 1 * p t * e t p t * p t n k f k , t − 1 + ( 1 + i t b ) p t − 1 * p t * e t p t * p t p t − 1 e t − 1 p t − 1 * λ t − 1 g d t − 1 + ( 1 + i * ) p t − 1 * p t * e t p t * p t × p t − 1 e t − 1 p t − 1 * λ t − 1 e u d t − 1 + ψ p 2 e t p t * p t n k f k , t + λ t g d t p t h p t n h Φ t h y i , t h − f ̄ 2 p t h p t n h Φ t h y i , t h + ψ g 2 e t p t * p t n k f k , t + λ t g d t p t h p t n h Φ t h y i , t h − f ̄ 2 p t h p t n h Φ t h y i , t h = e t p t * p t n k f k , t + λ t g d t + λ t e u d t

A.8 Tax Revenues

(S31) T t N ≡ τ t c n k Φ t c p t h p t c k , t h + p t f p t c k , t f + n w Φ t c p t h p t c w , t h + p t f p t c w , t f + n b Φ t c p t h p t c b , t h + p t f p t c b , t f + τ t y [ n k w t k Φ t l l k , t + n w w t w Φ t l l w , t + n b w t b Φ t l l b , t ] + τ t π n h PR t p t h p t Φ t h y i , t h − w t k l i , t k − w t w l i , t w − p t f p t m i , t f

A.9 Exports

(S32) c t f * = p t h p t f − ϑ

A.10 Fiscal Variables

(S33) w t b = s t w p t h p t n h Φ t h y i , t h n g l g , t

(S34) g g , t g = s t g n h Φ t h y i , t h n g

(S35) g g , t i = s t i n h Φ t h y i , t h n g

(S36) g ̄ t t r = s t t r p t h p t n h Φ t h y i , t h

(S37) m g , t g = p t h p t f s t m n h Φ t h y i , t h n g

(S38) T r t e u = s e u , t t r p t h p t n h Φ t h y i , t h

A.11 Country’s Interest Rate

(S39) i t * = i * + ψ i exp d t p t h p t n h Φ t h y i , t h − d ̄ − 1

A.12 Market-Clearing Conditions in Labor and Dividend Markets

(S40) N t k Φ t l l k , t = N h l i , t k

(S41) N w Φ t l l k , t = N h l i , t w

(S42) N b Φ t l l b , t = N g l g , t

(S43) N k π k , t = N h π i , t

A.13 Endogenous and Exogenous Variables

We therefore have a dynamic system of 43 equations, (S1)–(S43), in 43 variables. The latter are the paths of c k , t , c k , t h , c k , t f t = 0 ∞ , c w , t , c w , t h , c w , t f t = 0 ∞ , c b , t , c b , t h , c b , t f t = 0 ∞ , l k , t , l w , t , l b , t t = 0 ∞ , s k , t , s w , t , s b t t = 0 ∞ , f k , t , π k , t t = 0 ∞ , y i , t h , l i , t k , l i , t w , k _i,t, x _i,t, m i , t f , π _i,t, w t k , w t w t = 0 ∞ , y g , t g , l _g,t, k g , t g t = 0 ∞ , p t , p t h , p t f , i t b , i t * t = 0 ∞ , w t b , g g , t g , g g , t i , g ̄ t t r , m g , t g t = 0 ∞ , { T t N } t = 0 ∞ , { c t f * } t = 0 ∞ and { d t } t = 0 ∞ and { T r t e u } t = 0 ∞ . This is given the paths of fiscal instruments, τ t c , τ t y , τ t π , s t w , s t g , s t i , s t t r , s t m , s e u , t t r t = 0 ∞ , the fractions of public debt held by private agents abroad and EU institutions, λ t g , λ t e u t = 0 ∞ , the population shares, n k , n ^w, n ^b, n ^h, n g t = 0 ∞ , the degree of property rights, { P R t } t = 0 ∞ , foreign prices p t h * , p t f * , p t * t = 0 ∞ , the nominal exchange rate, { e t } t = 0 ∞ , the degree of substitutability between intermediate goods, θ t t = 0 ∞ , and the pandemic shocks, Φ t l , Φ t c , Φ t h t = 0 ∞ .

A.14 Transformed Variables

For convenience, we re-express some variables. We define p t f p t h ≡ TT t to be the terms of trade (an increase means an improvement in competitiveness vis-à-vis the rest of the world). Then, we have p t h p t = ( TT t ) ν − 1 , p t f p t = ( TT t ) ν , e t p t * p t = ( TT t ) 2 ν − 1 , Π t ≡ p t p t − 1 = Π t h TT t TT t − 1 1 − ν and TT t TT t − 1 = e t e t − 1 Π t h * Π t h , where Π t h ≡ p t h p t − 1 h . Also, e t e t − 1 is the gross rate of exchange rate depreciation which is set at one in a currency union. Hence, in the final system, we have Π t = Π t h TT t TT t − 1 1 − ν and TT t TT t − 1 = e t e t − 1 Π t h * Π t h and, in all other equations, we use the transformations p t h p t = ( TT t ) ν − 1 , p t f p t = ( TT t ) ν , e t p t * p t = ( TT t ) 2 ν − 1 . In other words, regarding prices, instead of p t , p t h , p t f t = 0 ∞ , now the endogenous variables are TT t , Π t h , Π t t = 0 ∞ . Recall that, in a small open economy, Π t h * ≡ p t h * p t − 1 h * is exogenous (we set it at 1 all the time), while Π t * ≡ p t * p t − 1 * can also be treated for simplicity as exogenous (we set it at 1 all the time) or, more generally, if we use p t * = ( p t h * ) ν ( p t f * ) 1 − ν , it can be written as Π t * ≡ p t * p t − 1 * = ( Π t h * ) ν Π t h 1 − ν (where we have set e t e t − 1 = 1 ); in our solutions, we simply set Π t * ≡ p t * p t − 1 * = 1 all the time.

Appendix B: Measure of Welfare Comparisons

Say there are two regimes, the pre-COVID and the COVID one, denoted respectively by superscripts P and C. Then, we solve for a consumption subsidy, ξ, which (as in the literature) remains constant over time and (for simplicity) is common across households, such that the households are indifferent between the two regimes. In other words, ξ solves (recall that public good provision is common across households):

(B1) ∑ t = 0 T β t n k [ μ 1 log c k , t P + μ 2 log u k , t P ] + n w [ μ 1 log c w , t P + μ 2 log u w , t P ] + n b [ μ 1 log c b , t P + μ 2 log u b , t P ] + μ 3 log ⁡ y ̄ t P = ∑ t = 0 T β t n k [ μ 1 log c k , t C 1 + ξ + μ 2 log u k , t C ] + n w [ μ 1 log c w , t C 1 + ξ + μ 2 log u w , t C ] + n b [ μ 1 log c b , t C 1 + ξ + μ 2 log u b , t C ] + μ 3 log ⁡ y ̄ t C

In our solutions, we work with T = 6. Also, for the pre-COVID regime, we use the values of the year 2019 repeatedly for all 6 periods, while, for the COVID period, we use the simulated time paths under scenario S0, S1 and S2.

Appendix C: Adding Firm Entry and (De)regulation Product Market Policy

Let us define two new variables, N t p h and Ξ_t. The former is the number of producing firms which are a fraction of the potential number of firms, N ^h, that is, 0 < n t p h ≡ N t p h N h ≤ 1 , whereas the latter refers to new entrants as a fraction of the remaining firms, N h − N t − 1 p h , that is, N t e ≡ Ξ t ( N h − N t − 1 p h ) is the number of new entrants at t. For a new firm to enter the market, it has to pay an entry cost denoted as F _t, which is a policy instrument.

Both n t p h and Ξ_t are determined endogenously. To do so, we follow the relevant literature (Ghironi and Melitz (2005), Bilbiie et al. (2008, 2012, Etro and Colciago (2010), Cavallari (2013), etc.) and add two new equations:

(C1) n t p h = ( 1 − Ω ) [ n t − 1 p f + Ξ t ( 1 − n t − 1 p h ) ]

(C2) V t = ( 1 − Ω ) π i , t + β i , t V t + 1

where the parameter 0 ≤ Ω < 1 is the exogenous death rate, V _t denotes the value of the firm (this is the present discounted value of the firm’s profits starting from the current period onwards) and β i , t ≡ β ( 1 − Ω ) ( 1 + τ t c ) c k , t ( 1 + τ t + 1 c ) c k , t + 1 is the discount factor adjusted by the death rate. Notice that the profit is net of the entry cost paid by new entrants (see below).

The above equations are consistent with the following sequence of events: At the start of the period, new entrants, N t e ≡ Ξ t ( N h − N t − 1 p h ) , pay the entry cost, F _t (in equilibrium, we set V _t equal to the exogenously set F _t). At this stage, the number of potential firms is N t − 1 p h + Ξ t ( N h − N t − 1 p h ) . In turn, a fraction, Ω, of these potential firms die so that the active firms are N t p h = ( 1 − Ω ) [ N t − 1 p h + Ξ t ( N h − N t − 1 p h ) ] , or, equivalently, dividing by the constant pool N ^h, n t p h = ( 1 − Ω ) [ n t − 1 p h + Ξ t ( 1 − n t − 1 p h ) ] . Finally, production, etc., take place. Notice that here we assume that entrants pay the entry cost before the death shock is realized and before production takes place and profits are known. This explains the specification above, namely, V _t = (1 −Ω)π _i,t + β _i,t V _t+1.

The firm’s profit (which is net of the entry cost, F _t, paid by the new entrants and which is expressed in domestic prices) changes to:

(C3) π i , t ≡ ( 1 − τ t π ) PR t p i , t h p t y i , t h − w t w l i , t w − w t k l i , t k − p t f p t m i , t f − p t h p t k i , t − ( 1 − δ ) k i , t − 1 − p t h p t ξ k 2 k i , t k i , t − 1 − 1 2 k i , t − 1 − p t h p t Ξ t ( 1 − n t − 1 p h ) n t p h F t

whereas the GDP identity changes to:

(C4) n k c k , t h + n w c w , t h + n b c b , t h + n t p h n h x k , t + n g ( g g , t g + g g , t i ) + c t f * + n t p h n h ξ k 2 k i , t k i , t − 1 − 1 2 k i , t − 1 + n t p h n h Ξ t ( 1 − n t − 1 p h ) n t p h F t = Φ t h n t p h n h y i , t h

namely, the entry cost is assumed to take the form of a resource cost (we have also experimented with the case in which the entry cost plays a distributive role in the sense that it becomes a revenue for the government (licences, etc.); the main results are not affected).

We therefore have a dynamic system of 45 equations, (S1)–(S24), (S26)–(S28), (S30)–(S43), plus (C1)–(C4), in 45 variables. The latter are c k , t , c k , t h , c k , t f t = 0 ∞ , c w , t , c w , t h , c w , t f t = 0 ∞ , c b , t , c b , t h , c b , t f t = 0 ∞ , l k , t , l w , t , l b , t t = 0 ∞ , s k , t , s _w,t, s b t t = 0 ∞ , f k , t , π k , t t = 0 ∞ , y i , t h , l i , t k , l i , t w , k _i,t, x _i,t, m i , t f , π _i,t, w t k , w t w , Ξ_t, n t p h t = 0 ∞ , y g , t g , l _g,t, k g , t g t = 0 ∞ , p t , p t h , p t f , i t b , i t * t = 0 ∞ , w t b , g g , t g , g g , t i , g ̄ t t r , m g , t g t = 0 ∞ , T t N t = 0 ∞ , c t f * t = 0 ∞ and d t t = 0 ∞ and { T r t e u } t = 0 ∞ . This is given the paths of fiscal instruments, τ t c , τ t y , τ t π , s t w , s t g , s t i , s t t r , s t m , s e u , t t r t = 0 ∞ , the fractions of public debt held by private agents abroad and EU institutions, λ t g , λ t e u t = 0 ∞ , the population shares, n k , n ^w, n ^b, n ^h, n g t = 0 ∞ , the degree of property rights, { P R t } t = 0 ∞ , foreign prices p t h * , p t f * , p t * t = 0 ∞ , the nominal exchange rate, { e t } t = 0 ∞ , the degree of substitutability between intermediate goods, θ t t = 0 ∞ , the pandemic shocks, Φ t l , Φ t c , Φ t h t = 0 ∞ , and the entry cost, { F t } t = 0 ∞ . Notice that now, in Eqs. (S1)–(S24), (S26)–(S28) and (S30)–(S43), we replace the exogenous n ^h with the endogenous product n t p h n h .

About new parameter values: The death rate is set at 5%. In the departing solution of the year 2019, the value of the entry cost, F _t, is chosen/calibrated such that the new model’s solution for the fraction of producing firms, n t p h , coincides with the value used in the baseline model of Section 2 (namely, 0.2). The same value is used under S0, S1 and S2. Then, when we move to the reformed economy of S4, the obtained value of F _t (which is treated as a policy instrument) is reduced by 20%. However, we report that our main results do not depend on the values assigned to these parameters.

The path of the number of firms under scenario S0, S1, S2 and S4 is shown in Figure A.1. As can be seen, the implementation of product market reforms, under S4, increases substantially the number of producing firms enhancing product market competition which, in turn, amplifies the multiplier impact of the fiscal stimulus under S2 (see the red dotted line in Figure 4 in the main text).

Figure A.1:

Economic impact of the lockdown under S0, S1, S2 and S4.

(% deviation of the number of private firms from its 2019 value).

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Received: 2020-12-13

Accepted: 2021-07-14

Published Online: 2021-08-02

The Impact of the Lockdown on the Greek Economy and the Role of the Recovery Fund

Abstract

Acknowledgements

Appendix A: Macroeconomic System

A.1 Households (the Three Types)

A.2 Price Indexes

A.3 Private Firms in a Symmetric Equilibrium

A.4 State Firms

A.5 Government Budget Constraint

A.6 Gross Domestic Product (GDP) Identity

A.7 Balance of Payments (Economy’s Resource Constraint)

A.8 Tax Revenues

A.9 Exports

A.10 Fiscal Variables

A.11 Country’s Interest Rate

A.12 Market-Clearing Conditions in Labor and Dividend Markets

A.13 Endogenous and Exogenous Variables

A.14 Transformed Variables

Appendix B: Measure of Welfare Comparisons

Appendix C: Adding Firm Entry and (De)regulation Product Market Policy

References

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