1979-2001: A Greek great depression through the lens of neoclassical growth theory

This paper focuses on the performance of the Greek economy during the period 1979-2001. Following the work of Cole and Ohanian (1999) and Kehoe and Prescott (2002, 2007) this twenty year episode can be characterized as a great depression. We use this methodology and ask whether, given the observed exogenous path of total factor productivity (TFP), the neoclassical growth model can generate an equilibrium behavior that has growth accounting characteristics similar to those in the data. The answer is affirmative: Changes in TFP are crucial in accounting for the Greek great depression. Our model economy predicts a big decline of economic activity during the 80s and until the mid-90s and a strong recovery for the period 1995-2001. This is exactly what happened in Greece. Moreover, the model successfully mimics the actual data with respect to the timing of peaks and troughs and the time paths of most key macroeconomic variables. However, puzzles between theory's predictions and the observed data are not missing. For instance, things are (not surprisingly for the neoclassical growth model) less successful when it comes to the labor factor.