Debt supercycle in greece and secular stagnation in the eurozone: Implications for policy

Abstract

Using a simple new Keynesian model, this chapter argues analytically that the ongoing fiscal consolidation and monetary expansion in the Eurozone are rather improper responses to strong signs of secular stagnation. Likewise, while fiscal consolidation is indispensable for Greece due to a soaring debt, the exclusion of the country from a drastic monetary expansion and/or the creditors’ denial of a debt relief are unwarranted as they push the economy into a recessionary spiral. An appropriate policy mix that addresses Eurozone’s secular stagnation and Greece’s debt supercycle seems to require a reversal of main actions, that is, the pursuit of fiscal expansion in the Eurozone and the adoption of monetary expansion or debt write-off in Greece.