DETERMINANTS OF GOVERNMENT DEBT IN GREECE: AN EMPIRICAL ANALYSIS

The European sovereign debt crisis started in 2008 with the collapse of Iceland's banking system. Regarding this crisis, Portugal, Ireland, Italy, Greece and Spain collectively called PIIGS are the most affected countries. This paper investigates the determinants of the Greek general government debt using the Vector Error Correction Model framework, Variance Decomposition and the Generalized Impulse Response Function analysis. The results revealed a significant negative relationship between general government debt and government deficit, general government debt and inflation. The relationship between general government debt and current account balance is positive and significant; however, an insignificant relationship exists between gross savings and general government debt. Variation in general government debt in Greece over the years is highly cause by general government debt, followed by current account balance and inflation over the remaining periods. Shocks to general government and inflation will cause general government debt to increase while shocks to government deficit, gross savings and current account balance will cause general government debt to decrease.