## 1. Capital Stock and Output

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### Key findings (Background)
- To raise potential growth and living standards, Greece needs stronger capital accumulation and productivity given an aging society and shrinking population.  
- IMF staff’s baseline projects that the real investment rate stabilizes between 15–17 percent of GDP over the medium term (from 11.6 percent at end-2020).  
- The Greek Government’s baseline in the 2021 Stability and Growth Pact envisages the investment-GDP ratio to reach around 17 percent by 2025, driven by the Recovery and Resilience National Plan (RRP).  
- Both IMF staff and Government estimates are below Greece’s pre-sovereign debt crisis peak investment rate of 24 percent of GDP.  
- Investment averaged about 0 percent growth during 2015–19, resulting in an investment-to-GDP ratio of 10 percent at end-2019—about 10 percentage points lower than the regional average.  
- Greece’s net capital stock contracted by an average of 1.2 percent annually in the last decade, while output contracted by 22 percent cumulatively.

### Capital stock and sectoral composition
- Total capital stock to GDP ratio is close to the euro area’s average; net capital stock per capita is about two thirds of the Euro Area’s average.  
- Most capital stock is private (70 percent of total).  
- Public-to-private capital ratio estimated close to 45 percent in 2019, higher than the growth-maximizing ratio found in the literature for advanced economies (42 percent).  
- Public capital stock was the third largest in the region in percent of GDP at end-2019.

### Infrastructure and sectoral gaps
- Transportation infrastructure: nearly 30 percent lower road density and 60 percent lower railroad density compared to peers.  
- Mobile phone penetration is 7 percent below EU average.  
- Number of hospital beds was 16 percent below the EU as of 2019.  
- Health security index in 2018 was lower than regional average.  
- Greece closer to EU average in electricity generation capacity and renewable energy production; water supply reliability ranks high.

### Investment rates and composition (2019 highlights)
- Investment-to-GDP ratio at end-2019: 10 percent of GDP (one of the lowest in the world and the lowest in the EU).  
- Post-GFC period: flat annual investment-to-GDP ratios with volatile quarterly swings driven by ship and arms/equipment purchases.  
- Real estate investment declined by more than 80 percent from 2007 to 2019; real estate investment represents less than 1 percent of GDP versus EU average of 4.5 percent of GDP.  
- Low investment is broad-based: both business and household investment rank at the bottom among EU countries in 2019.  
- Business investment: about 10 percentage points lower compared to the EU average.  
- Household investment: sharpest drop—over 10 percentage points since the sovereign debt crisis.  
- Government investment: relatively stable and historically higher than EU average in relative terms; public capital expenditure boosted by EU funds has been around 2 percentage points higher than EU level until 2011, dipped, rebounded in 2013, and dipped again in 2019.

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### Is Greece under-investing? Benchmarking approaches
- Three benchmark methodologies used to estimate total investment benchmark rates:
  - Golden Rule: neo-classical growth model steady-state equilibrium investment rate.  
  - Historical Benchmark: stylized transition investment dynamics from advanced EU peers (Germany, France, Spain, Italy).  
  - Predicted Norm: panel regression-predicted investment rate based on economic fundamentals and structural characteristics for a sample of 27 EU countries over three decades.

### Estimated investment gap (end-2019 ranges and interpretations)
- Estimated investment gap at end-2019 ranges from 1.6 to 8 percent of GDP depending on method and specification.  
  - Golden Rule (standard estimate): investment gap of about 4 percent of GDP for the 2015–19 period.  
  - Historical Benchmark: largest estimated gap at end-2019 of 8 percent of GDP (upper bound, assumes full convergence).  
  - Predicted Norm: smallest gap at end-2019 of 1.6 percent of GDP (explained by income level, fundamentals, structural characteristics).

### Sensitivity and drivers
- Golden Rule approach sensitive to assumptions about share of self-employed workers and savings preferences.  
- Predicted Norm regression: benchmark highly sensitive to structural controls—income and fundamentals alone predict a benchmark close to 20 percent of GDP (implying an 8 percentage point gap), while adding structural constraints (service share, capital account openness, regulatory quality, debt) reduces predicted gap to 1.6 percent of GDP.  
- Main contributors to the fall in investment from 2007 to 2019: structural factors—services share, capital account openness, and regulatory quality—together accounting for over 50 percent of the decline.

### Selected model outcomes (Investment gap in 2019 under various specifications, Table 2)
- Model m1: -11.7 (percent of GDP)  
- Model m2: -10.2  
- Model m3: -8.1  
- Model m4: -6.4  
- Model m5: -4.7  
- Model m6: -3.9  
- Model m7: -1.6

---

### Sectoral drivers of low investment

Business investment constraints
- Corporate investment averaged 7 percent of GDP in the decade preceding the GFC and around 5½ percent of GDP since.  
- 2020 EIB Survey: 71 percent of firms indicate they invested the “right” amount in the past three years (EU average 80 percent); two thirds of firms were operating at or about capacity in 2019.  
- Main barriers cited by firms:
  - Business regulation: 95 percent in 2019; 86 percent in 2020.  
  - Energy costs: 79 percent in 2019; 70 percent in 2020.  
  - Labor market regulations: 78 percent in 2019; 71 percent in 2020.  
  - Uncertainty about the future: 92 percent of firms.  
  - Low domestic demand: 62 percent of firms.

Financial and return-related constraints
- Gross return on capital of Non-Financial Corporations (NFCs): peaked at 34 percent in 2008 and 38 percent in 2011; fell to 13.7 percent in 2019—10 percentage points below the EA average.  
- Corporate debt burden: average net debt-to-income ratio of Greek NFCs increased since 2013 and by 2016 had more than doubled compared to 2008. Greece companies feature the second highest gross debt burden for the EA-15 region.  
- NFC saving-to-GDP ratio: lower than EU average pre-crisis and dipped into single-digit percentage points in 2018.  
- Credit constraints: negative credit growth until 2020; 13 percent of firms report lack of access to finance (EU average 6 percent); 12 percent cite high cost of finance (EU average 5 percent); 10 percent cite collateral rules.

Household investment dynamics
- National saving average from 2010 to 2019: 9.2 percent of GDP—13 percentage points below the regional average.  
- Household savings have been negative since 2012 despite recovery in disposable income and employment.  
- High home ownership and prior heavy real estate investment, combined with plummeting housing prices after the sovereign debt crisis, drove the drop in household investment; households dis-saved to cope with income reduction and reduced credit availability.  
- Real estate sector showed signs of recovery prior to the pandemic (tourism, Airbnb, Golden Visa interest); housing prices continued increasing during the pandemic through Q2-2021. Data on housing starts/transactions limited as series production halted after the GFC.

Public investment
- Public investment-to-GDP ratio broadly stable and slightly higher than regional average.  
- Possible measurement reasons: capital transfers classified as investment; rising importance of EU structural funds in a shrinking economy; investments needed to maintain large public capital stock held by SOEs.  
- Public-to-private capital ratio at 45 percent at end-2019.

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### Conclusions and policy recommendations

Summary conclusions
- There is scope to expand private investment potential through structural reforms and sound macro-financial policies.  
- The predicted norm and the golden rule complement each other; together with the historical benchmark they gauge Greece’s investment gap.  
- Empirical analysis finds higher investment associated with lower debt burden, smaller service share, higher capital account openness, and better regulatory quality. High prevalence of self-employment appears to hold back investment. Structural constraints explain the bulk of Greece’s investment gap.

Selected policy recommendations
- Product market reforms to encourage economies of scale and trade facilitation to integrate micro family-owned firms into global markets to boost corporate investment.  
- Policies to raise earnings and corporate profitability to encourage household savings and household investment (higher wages and more dynamic real estate market).  
- Measures to support young people’s housing demand: access to credit, good-paying jobs, infrastructure and services (transport, childcare, elder care, unemployment benefits).  
- Authorities’ actions underway: Recovery and Resilience Plan and 2020 National Growth Strategy with reforms to modernize the judicial system, digitalization, green investments, up- and re-skilling, and business process deregulatory measures; lower tax wedge and cuts to red tape; efforts to improve public investment efficiency (interoperability of public investment budget, Strategic Projects Pipeline, Project Preparation Facility).  
- NGEU-grant financed investment and PPPs could boost growth if fully executed.  
- IMF PIMA technical assistance requested and in progress to maximize public investment payoffs of NGEU funds.  
- More ambitious reforms recommended: overhaul judicial system; complete cadaster reform; pension adjustments to encourage private savings and older-worker participation; tackle barriers to competitive product markets and closed professions; complete privatizations that attract greenfield projects and strengthen corporate governance and competition.  
- Prioritize sequencing of reforms and public investment allocation to maximize the investment potential of NGEU resources; further analytical work recommended to explore interactions between public and private capital (supplementarity vs substitution) to guide public investment allocation.

---

### Appendix I — Investment Gap Estimations: Golden Rule scenarios & methodological notes
- Golden Rule interpretation: lower bound convergence investment rate as country approaches steady state; uses an augmented Ramsey-Cass-Koopmans framework with parameters α (capital share), p (social rate of time preference, SRTP), δ (depreciation), n (labor force growth), g (technical progress).  
- Greece estimation follows IMF (2016) methodology using Penn World Tables updated to version 10.0. Capital share adjusted by reducing either 100 or 63 percent of self-employed income. SRTP in IMF (2016) set to 5 percent; analysis tests alternative SRTPs. Welfare-relevant TFP (absorption-based) used in some specifications.

Golden Rule scenario outcomes (verbatim scenario labels and gaps as presented)
- GR5-0.8 Self-employed income accrues 100 percent to labor.  
- GR41.9 SRTP=6 (higher consumption).  
- GR33.1 Self-employed income accrues 67 percent to labor.  
- GR13.8 No adjustment to PWT values, SRTP=5.  
- GR65.5 Adjusted for welfare-relevant TFP (based on absorption).  
- GR26.3 SRTP=4.0 (lower consumption).  
- GR76.9 SRTP=3.5 (lowest consumption).

Historical Benchmark approach
- Uses transition dynamics from Germany, France, Italy, and Spain (1951–2011) to compute a sustainable “historical benchmark” investment rate for given K/L and productivity; empirical fit on that panel yielded R2=0.87.

Predicted Norm (panel regression approach)
- Estimated via panel fixed-effects regression for 27 EU countries over three decades, including country and year fixed effects and controls for fundamentals and structural characteristics (regulatory efficiency, service share, financial account openness, debt, private credit growth, short-term deposit rate, GDP per capita, GDP growth, export share, NPL ratio). Robustness checks and alternative specifications tested; final specification balances data availability and fit.

Appendix Table 2 variables (as presented)
- Investment rate: Gross fixed capital formation; Unit: percent of GDP; Country: EU27 countries; Time series: 1960-2019 or longest available; Source: IMF WEO.  
- GDP per capita: GDP in constant prices, PPP; Unit: International $; Country: EU27 countries; Time series: 1960-2019 or longest available; Source: IMF WEO.  
- GDP growth: Year-on-year GDP growth rate; Unit: percent; Country: EU27 countries; Time series: 1960-2019 or longest available; Source: IMF WEO.  
- Private credit/GDP growth: Year-on-year change in domestic credit to private sector; Unit: percent of GDP; Country: EU27 countries; Time series: 1960-2019 or longest available; Source: WB WDI.  
- Short-term deposit rate: Short-term deposit rate; Unit: percent; Country: EU22 countries; Time series: 1960-2019 or longest available; Source: IMF WEO.  
- Debt/GDP: The sum of general government and private sector debt; Unit: percent of GDP; Country: EU27 countries; Time series: 1995-2019 or longest available; Source: IMF WEO; Eurostat.  
- Service/Gross value added: The share of service sector in gross value added; Unit: percent; Country: EU27 countries; Time series: 1995-2019 or longest available; Source: Eurostat.  
- Capital account openness: Lack of financial restrictions on capital account transactions; Unit: Index, 0-100; Country: EU26 countries; Time series: 1980-2018 or longest available; Source: Update on Quinn and Toyoda (2008).  
- Regulatory quality: World Bank estimates; Unit: Index, 0-3; Country: EU27 countries; Time series: 1995-2019 or longest available; Source: WB WGI.

*Source: wpiea2022013-print-pdf — 1. Capital Stock and Output; https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022013-print-pdf.pdf*

### 1. Capital Stock and Output _________________________________________________________ 6

### 1. Capital Stock and Output

### Major sections (chapter organization)
- 1. Capital Stock and Output _________________________________________________________ 6
- 2. Selected Infrastructure ___________________________________________________________ 7
- 3. Investment Rate ________________________________________________________________ 8
- 4. Investment by Industry ___________________________________________________________ 9
- 5. Investment by Economic Sector ___________________________________________________ 10
- 6. Benchmark Investment Rates and Investment Gap ____________________________________ 12
- 7. Determinants of the Investment Gap _______________________________________________ 13
- 8. Other Drivers of Low Business Investment  __________________________________________ 16
- 9. Drivers of Household Investment   _________________________________________________ 18
- 10. Transport, ICT, & Health Infrastructure Gap  ________________________________________ 21

### Tables and Appendix
- Table 1. Estimating Benchmark Investment Rates: Three Analytical Approaches  ___________________ 11
- Table 2. Investment Gap Estimates under different Model Specifications __________________________ 14
- Appendix I. Investment Gap Estimations ______________________________________________________ 23

*Source: wpiea2022013-print-pdf - 1. Capital Stock and Output; https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022013-print-pdf.pdf*

### References _____________________________________________________________________ 27

### A. Background

### Key findings
- To raise potential growth and living standards, Greece needs stronger capital accumulation and productivity, particularly given an aging society where a shrinking population is expected to weigh heavily on potential output.  
- IMF staff’s baseline projects that the real investment rate stabilizes between 15–17 percent of GDP over the medium term (from 11.6 percent at end-2020).  
- The Greek Government’s baseline in the 2021 Stability and Growth Pact envisages the investment-GDP ratio to reach around 17 percent by 2025, driven by the Recovery and Resilience National Plan (RRP).  
- Both IMF staff and Government estimates are below Greece’s pre-sovereign debt crisis peak investment rate of 24 percent of GDP, which had been associated with an unsustainable current account deficit.  
- Investment averaged about 0 percent growth during 2015–19, resulting in an investment-to-GDP ratio of 10 percent at end-2019—about 10 percentage points lower than the regional average.  
- Greece’s net capital stock contracted by an average of 1.2 percent annually in the last decade, while output contracted by 22 percent cumulatively.

---

### B. Capital Stock and Investment: Where Does Greece Stand?

### Capital stock and sectoral composition
- Total capital stock to GDP ratio is close to the euro area’s average; net capital stock per capita is about two thirds of the Euro Area’s average.  
- Most capital stock is private (70 percent of total), and the private capital stock lags peers; the public capital stock is higher-than-average and was the third largest in the region in percent of GDP at end-2019.  
- Public-to-private capital ratio estimated close to 45 percent in 2019, higher than the growth-maximizing ratio found in the literature for advanced economies (42 percent).

### Infrastructure and sectoral gaps
- Transportation infrastructure: nearly 30 percent lower road density and 60 percent lower railroad density compared to peers (partly due to geography).  
- Energy, digital, and healthcare infrastructure show smaller but notable gaps. Mobile phone penetration is 7 percent below EU average. Number of hospital beds was 16 percent below the EU as of 2019. Health security index in 2018 was lower than regional average.  
- Greece closer to EU average in electricity generation capacity and renewable energy production; water supply reliability ranks high while water transport has gaps.

### Investment rates and industry composition
- At end-2019, Greece’s investment-to-GDP ratio was 10 percent of GDP—one of the lowest in the world and the lowest in the EU.  
- The post-GFC period saw flat annual investment-to-GDP ratios with volatile quarterly swings driven by ship and arms/equipment purchases.  
- Investment declines concentrated in real estate (dwellings and other building structures fell by more than 80 percent from 2007 to 2019). Real estate investment now represents less than 1 percent of GDP versus EU average of 4.5 percent of GDP.  
- Low investment is broad-based: business and household investment both rank at the bottom among EU countries in 2019.

### Investment by sector (2019 highlights)
- Business investment: widest gap—about 10 percentage points lower compared to the EU average.  
- Household investment: experienced the sharpest drop (over 10 percentage points) since the sovereign debt crisis; it used to be half of total investment pre-crisis.  
- Government investment: relatively stable and historically higher than EU average in relative terms; public capital expenditure boosted by EU funds has been around 2 percentage points higher than EU level until 2011, dipped, rebounded in 2013, and dipped again in 2019.

---

### C. Is Greece under-investing? Alternative methodologies for estimating the Investment Gap

### Approaches applied
- Three benchmark methodologies used to estimate total investment benchmark rates:
  - Golden Rule: neo-classical growth model steady-state equilibrium investment rate.  
  - Historical Benchmark: stylized transition investment dynamics from advanced EU peers (Germany, France, Spain, Italy).  
  - Predicted Norm: panel regression-predicted investment rate based on economic fundamentals and structural characteristics for a sample of 27 EU countries over three decades.

### Estimated gaps and interpretation
- The estimated investment gap at end-2019 ranges from 1.6 to 8 percent of GDP depending on method and specification.
  - Golden Rule (standard estimate): investment gap of about 4 percent of GDP for the 2015–19 period. Adjustments to labor share, savings preferences, or TFP methodology change gap size.  
  - Historical Benchmark: largest estimated gap at end-2019 of 8 percent of GDP; represents an upper bound and assumes full convergence to mature economy characteristics.  
  - Predicted Norm: smallest gap at end-2019 of 1.6 percent of GDP; suggests low investment largely explained by Greece’s income level, economic fundamentals, and structural characteristics.

### Drivers and sensitivity
- The golden rule approach is sensitive to assumptions about the share of self-employed workers and savings preferences.  
- The predicted norm regression shows the investment benchmark is highly sensitive to structural controls: income level and economic fundamentals alone predict a benchmark close to 20 percent of GDP (implying an 8 percentage point gap), but adding structural constraints (service share, capital account openness, regulatory quality, debt) reduces the predicted gap to 1.6 percent of GDP.  
- Main contributors to the fall in investment from 2007 to 2019 are structural factors: services share, capital account openness (capturing capital flow management measures in 2015), and regulatory quality—together accounting for over 50 percent of the decline.

### Table summary (selected outcomes)
- Investment gap in 2019 under various model specifications (from Table 2):
  - Model m1: -11.7 (percent of GDP)  
  - Model m2: -10.2  
  - Model m3: -8.1  
  - Model m4: -6.4  
  - Model m5: -4.7  
  - Model m6: -3.9  
  - Model m7: -1.6

---

### D. Sectoral Drivers of Investment

### Business investment constraints
- Corporate investment averaged 7 percent of GDP in the decade preceding the GFC and around 5½ percent of GDP since.  
- 2020 EIB Survey: 71 percent of firms indicate they invested the “right” amount in the past three years (EU average 80 percent); two thirds of firms were operating at or about capacity in 2019.  
- Main barriers cited by firms: business regulation (95 percent in 2019; 86 percent in 2020), energy costs (79 percent in 2019; 70 percent in 2020), labor market regulations (78 percent in 2019; 71 percent in 2020). 92 percent of firms cited uncertainty about the future; 62 percent cited low domestic demand.

### Financial and return-related constraints
- Low returns on capital: gross return on capital of Non-Financial Corporations (NFCs) dropped from a pre-crisis peak of 34 percent in 2008 and 38 percent in 2011 to a historic low of 13.7 percent in 2019—10 percentage points below the EA average.  
- High corporate debt burden: average net debt-to-income ratio of Greek NFCs increased since 2013 and by 2016 had more than doubled compared to 2008. Greece companies still feature the second highest gross debt burden for the EA-15 region.  
- NFC saving problems: NFC saving-to-GDP ratio was lower than EU average pre-crisis and dipped into single-digit percentage points in 2018.  
- Credit constraints: access to bank credit reduced since the GFC, with negative credit growth until 2020; banks deleveraging and high though fast-declining NPEs constrain credit supply. 13 percent of firms report lack of access to finance (EU average 6 percent); 12 percent cite high cost of finance (EU average 5 percent); 10 percent cite collateral rules.

### Household investment dynamics
- Household investment decline closely linked to income and savings dynamics. National saving average from 2010 to 2019 was 9.2 percent of GDP—13 percentage points below the regional average.  
- Household savings have been negative since 2012 despite recovery in disposable income and employment.  
- High degree of home ownership and prior heavy investment through real estate combined with plummeting housing prices after the sovereign debt crisis drove the drop in household investment; households dis-saved to cope with income reduction and reduced credit availability.  
- Real estate sector showed signs of recovery prior to the pandemic (tourism, Airbnb, Golden Visa interest); housing prices continued increasing during the pandemic through Q2-2021. Data on housing starts/transactions limited as series production halted after the GFC.

### Public investment
- Public investment-to-GDP ratio broadly stable and slightly higher than regional average. Possible reasons: measurement issues (capital transfers classified as investment), rising importance of EU structural funds in a shrinking economy, and investments needed to maintain large public capital stock held by SOEs. Public-to-private capital ratio at 45 percent at end-2019.

---

### E. Conclusion and Policy Recommendations

### Summary conclusions
- There is scope to expand private investment potential through structural reforms and sound macro-financial policies.  
- Two approaches—the predicted norm and the golden rule—complement each other; together with the historical benchmark they provide a gauge of Greece’s investment gap.  
- Empirical analysis finds countries invest more with lower debt burden, smaller service share, higher capital account openness, and better regulatory quality. High prevalence of self-employment also appears to hold back investment. Structural constraints explain the bulk of Greece’s investment gap.

### Policy recommendations (selected)
- Product market reforms to encourage economies of scale and trade facilitation to integrate micro family-owned firms into global markets to boost corporate investment.  
- Policies to raise earnings and corporate profitability to encourage household savings and household investment (higher wages and more dynamic real estate market).  
- Measures to support young people’s housing demand: access to credit, good-paying jobs, infrastructure and services (transport, childcare, elder care, unemployment benefits).  
- Authorities’ actions already underway include the Recovery and Resilience Plan and 2020 National Growth Strategy with reforms to modernize the judicial system, digitalization, green investments, up- and re-skilling, and business process deregulatory measures; lower tax wedge and cuts to red tape; efforts to improve public investment efficiency (interoperability of public investment budget, Strategic Projects Pipeline, Project Preparation Facility). NGEU-grant financed investment and PPPs could boost growth if fully executed.  
- IMF PIMA technical assistance requested to maximize public investment payoffs of NGEU funds; PIMA is in progress.  
- More ambitious reforms that could unlock private investment without endangering external sustainability: overhaul judicial system, complete cadaster reform, pension adjustments to encourage private savings and older-worker participation, tackle barriers to competitive product markets and closed professions, complete privatizations that attract greenfield projects and strengthen corporate governance and competition.  
- Prioritize sequencing of reforms and public investment allocation to maximize the investment potential of NGEU resources; further analytical work recommended to explore interactions between public and private capital (supplementarity vs substitution) to guide public investment allocation.

*Source: wpiea2022013-print-pdf (selected sections: A–E).*

### Appendix I. Investment Gap Estimations

### Appendix I. Investment Gap Estimations

### Golden Rule approach and theoretical framework
- The Golden Rule approach is interpreted as a lower bound to which a country’s investment rate eventually converges as it approaches its steady state level, underpinned by its structural characteristics and exogenous parameters.
- A neo-classical growth model (Cass-Koopmans), modified to allow for exogenous growth of labor-augmenting productivity, predicts convergence to a steady-state equilibrium in which income, consumption, and capital grow at a fixed rate equal to the sum of the growth rates of the labor force and labor-augmenting productivity.
- In the augmented neoclassical (Ramsey-Cass-Koopmans) growth model, an economy converges to its steady state where consumption is maximized, the saving/investment rate is constant at its “golden-rule” value, and income, consumption, and capital grow at a fixed rate equal to the sum of the exogenous growth rates of the labor force and labor-augmenting productivity.
- The Golden Rule of capital accumulation is given in the source by a formula referencing parameters:
  - α is the capital share of output;
  - p is the social rate of time preference (SRTP);
  - δ is the depreciation rate;
  - n is the growth of the labor force; and
  - g is the rate of technical progress.

### Methodology and data for Greece
- The estimate replicated for Greece follows the methodology IMF (2016) used for EU countries, using Penn World Tables (PWT) data, updated to version 10.0.
- Capital share of output is adjusted based on Eurostat balance sheet data, reducing it by either 100 or 63 percent of self-employed income given Greece’s prevalence of micro firms and large segment of self-employed.
- In IMF (2016), the SRTP is constant and set equal to 5 percent for all countries (SRTP derived from the golden rule under the assumption that the euro area was close to its steady-state path on average over 2002–14). The analysis tests other SRTPs given observed dis-saving in Greece over the past decade and potential future changes in saving behavior.
- The new PWT 9.0 data set includes total factor productivity based on absorption (“Welfare-relevant TFP”) instead of domestic demand; the results do not vary much when using this measure.
- Scenarios and variations are summarized in the Appendix Table 1 text (verbatim entries from the source):

  - Scenario Gap (% of GDP) Adjustment
  - GR5-0.8 Self-employed income accrues 100 percent to labor.
  - GR41.9SRTP=6 (higher consumption).
  - GR33.1Self-employed income accrues 67 percent to labor.
  - GR13.8No adjustment to PWT values, SRTP=5.
  - GR65.5Adjusted for welfare-relevant TFP (based on absorption).
  - GR26.3SRTP=4.0 (lower consumption).
  - GR76.9SRTP=3.5 (lowest consumption).

### Historical Benchmark approach
- The Historical Benchmark provides a yardstick investment rate (for a given K/L ratio and technology) consistent with capital accumulation paths of selected advanced European economies during 1951–2011 that proved to be sustainable.
- Advantages and disadvantages:
  - Advantage: does not require assumptions about the social rate of time preference and the position on the saddle-path.
  - Disadvantage: assumes similarity in economic structures of selected countries and their advanced peers; may be unsuitable for Greece under current structure because periods when investment approached the historical benchmark were characterized by unsustainable external and fiscal positions.
- The benchmark values can be calculated for each country and point in time, given TFP and population growth rates and the country’s capital-labor ratio; the benchmark is a proxy for a sustainable path of the investment rate during transition to steady state.
- Transition dynamics intuition:
  - Catch-up is driven by differences in real interest rates affecting intertemporal choices of consumption and savings (Euler equation).
  - Relative capital scarcity raises the real return to capital, stimulating saving and investment and accelerating capital accumulation; as K/L rises, real return declines and saving/investment rates fall toward steady-state.
  - The transition path for the investment rate I/Y may be approximated by a function of the real return to capital (marginal product of capital), using a Cobb-Douglas production function where A is labor-augmenting productivity, K is capital, L is labor, and α is the capital share.
- Empirical fitting:
  - The specified transition path for the investment rate was fitted on a panel for Germany, France, Italy, and Spain over 1951–2011 (R2=0.87, asterisks denote statistical significance with *** at 1 percent and ** at 5 percent).
  - Using estimated parameters and Greece’s country-specific K/L ratio and labor-augmenting productivity, the sustainable “historical benchmark” investment rate was computed to mimic earlier transition dynamics of advanced economies.

### Predicted Norm (panel regression approach)
- The “Predicted Norm” is estimated using a panel fixed-effects regression model for 27 EU countries (sample size varies with data availability) over the past three decades.
- Specification features:
  - Includes both country and year fixed effects.
  - Controls for countries’ economic fundamentals and structural characteristics identified in the literature as significant determinants of investment (regulatory efficiency, service share, financial account openness).
  - Staff tested controls including OECD Product Market Regulation indicators, World Economic Forum Global Competitiveness Index, NPL ratio, export share of GDP, terms of trade, and uncertainty index (terms of trade and uncertainty index were insignificant).
  - Multicollinearity among macro regressors was detected but did not affect overall fit and predictive power; mitigation included using different lagged values for key controls (GDP per capita and regulatory quality) and running robustness checks with random effects and dynamic panel models.
  - Overall, key results are robust across alternative specifications; the final model specification balances data availability and best fit.

### Appendix Table 2: Predicted Norms — Variables (as presented)
- Investment rate
  - Gross fixed capital formation
  - Unit: percent of GDP
  - Country: EU27 countries
  - Time series: 1960-2019 or longest available
  - Source: IMF WEO
- GDP per capita
  - GDP in constant prices, PPP
  - Unit: International $
  - Country: EU27 countries
  - Time series: 1960-2019 or longest available
  - Source: IMF WEO
- GDP growth
  - Year-on-year GDP growth rate
  - Unit: percent
  - Country: EU27 countries
  - Time series: 1960-2019 or longest available
  - Source: IMF WEO
- Private credit/GDP growth
  - Year-on-year change in domestic credit to private sector
  - Unit: percent of GDP
  - Country: EU27 countries
  - Time series: 1960-2019 or longest available
  - Source: WB WDI
- Short-term deposit rate
  - Short-term deposit rate
  - Unit: percent
  - Country: EU22 countries
  - Time series: 1960-2019 or longest available
  - Source: IMF WEO
- Debt/GDP
  - The sum of general government and private sector debt
  - Unit: percent of GDP
  - Country: EU27 countries
  - Time series: 1995-2019 or longest available
  - Source: IMF WEO; Eurostat
- Service/Gross value added
  - The share of service sector in gross value added
  - Unit: percent
  - Country: EU27 countries
  - Time series: 1995-2019 or longest available
  - Source: Eurostat
- Capital account openness
  - Lack of financial restrictions on capital account transactions
  - Unit: Index, 0-100
  - Country: EU26 countries
  - Time series: 1980-2018 or longest available
  - Source: Update on Quinn and Toyoda (2008)
- Regulatory quality
  - World Bank estimates
  - Unit: Index, 0-3
  - Country: EU27 countries
  - Time series: 1995-2019 or longest available
  - Source: WB WGI

*Appendix I. Investment Gap Estimations — source PDF: wpiea2022013-print-pdf (Appendix I).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022013-print-pdf.pdf_