Date of Graduation

Spring 5-22-2015

Document Type

Thesis

Degree Name

Master of Science in International and Development Economics (MSIDEC)

College/School

College of Arts and Sciences

Department/Program

Economics

First Advisor

Sunny Wong

Abstract

For years, the Vector Autoregressive approach has been the main tool for monetary economics and macroeconomic researchers around the world. Leading central banking figures, academics, and modern economic think tanks have used the approach to determine the effects of interest rate shocks on basic macroeconomic variables such as GDP, industrial production and unemployment rate. Shocking policy variables, such as interest rates or long term bond rates have given economists the ability to run reliable forecasts. The last 20 years have seen a turn in the use of the VAR approach on fiscal policy as well. Even though, in general, previous work has shown the ineffectiveness of fiscal policy towards controlling or affecting main macro variables, the following paper will analyze how fiscal policy shocks can indeed change essential macroeconomic variables using the VAR method. The country in focus is Greece, whose economy has been hampered and tormented by a deep debt crisis and subsequent strict austerity measures. The absence of independent, sovereign monetary policy after the replacement of the drachma with the Euro on January 1st 2002 has left the Greek government powerless with fiscal policy as its only weapon to get out of its long recession. The following sections of this paper will show how a shock in the country's government spending has the desired Neo-Keynesian effects, but only in the very short term. Interestingly, an unexpected increase in tax revenue has the most profound long term effect in decreasing the country's unemployment rate while giving a long term, permanent push on exports. Increasing efficiency in tax collection and not necessarily tax rates, can be a major catalyst for Greece, a country with chronic tax evasion and tax avoidance issues.

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