Should Greece adopt a dual-currency regime to resolve its economic crisis?

Our small macroeconomic model examines the scenario of introducing a dual-currency regime in Greece in order to restore its fiscal imbalances in the aftermath of the outbreak of the Greek crisis. Particular attention is paid to the contraction of the economic output until a fiscal equilibrium is achieved. The conclusion for the policy maker is that in the dual-currency scenario, changes in output are smoothed out compared to the scenario of staying within the euro area; however, the level of debt versus GDP deteriorates, largely due to the currency devaluation. More important, irrespective of the selected currency regime, a continuous reduction in the government expenditure is indispensable for the government in order to restore the fiscal equilibrium.