Why is there still inflation in Greece? (model this)

The rates of price inflation in Greece have been running in the range of 0.8% to 2%.

For another point of view, try this article:

The new bank that emerged from the breakup of Greece’s troubled Hellenic Postbank will initially hire all of the old lender’s staff but offer voluntary redundancies as it tries to cut payroll costs by 30 percent, its management said on Saturday.

The latter story of course is not just specific to a single firm but is common from Greece over the last few years.

It’s funny how many people pretend to understand what is going on here.  If Greece were seeing a stronger bout of price deflation, the situation would be much clearer.  How can you try to explain these disparate facts?

1. The true rate of inflation is much lower — in fact there is deflation — because of reporting biases in the Greek CPI.  That’s putting a lot of faith in numbers we do not see, plus it does not explain why the recorded numbers still show some upward pressure.

2. For structural adjustment reasons Greece needs a big cut in real wages, but AD is holding up OK.  It’s hard for me to believe the last part of that one.

3. You can have a major and sustained whack to AD, but still have rising prices.  How so?  Would Lieutenant Colombo be happy with this?

4. Scott Sumner has a view which I do not understand, and thus do not wish to try to state, but it has something to do with not really believing in the concept of price inflation.

5. Prices are sticky, AD is falling, and almost all of the adjustment is in quantities.  Yet this still doesn’t explain why prices are inching up, and furthermore it is grossly at variance with the actual empirical literature on price stickiness (much neglected in the blogosphere I should add), which is not nearly as strong as wage stickiness.

6. There are multiple equilibria, and Greece is moving from a perception of having “nearly West European levels of trust and cooperation” to having “Balkan levels of trust and cooperation,” and that is causing real wages and investment to plummet.  I’ve toyed with this hypothesis in the past, but I would be the first to admit it is highly speculative.  I do still think it is part of the explanation.

There is a similar puzzle for some of the other eurozone economies, and even, to a much smaller degree, for the United States over the last few years.


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