EXCHANGE RATE DEVALUATION VS. INTERNAL DEVALUATION IN GREECE

As the Greek debt crisis flustered again the financial markets during 2015, discussions about "new drachma" and parallel currencies intensified among the economists. Not surprisingly, as the Greek situation in the aspects of the ATM withdrawal restrictions, bank runs, capital controls and mounting debt reminded Argentina in late 2001. As the negotiations about the third Greek bailout programme were anxiously extending, speculations about (temporary) exit from the Euro Area and new devalued local currency became more vivid. In the theoretical Mundell-Fleming framework currency devaluation is output expansionary. However empirical results are less convincing and paint rather mixed picture, especially for the developing countries struggling with the crisis. Our paper aims to empirically investigate relationship between exchange rate devaluation and Greek output. Furthermore, we attempt to analyze benefits and costs of the theoretical exchange rate devaluation on Greek economy compared to internal devaluation measures, which Greece has agreed to undergo after signing the third bailout.