Sunday, January 20, 2013

Why there is inflation in Greece - one explanation

Tyler Cowen pondered:
"The rates of price inflation in Greece have been running in the range of 0.8% to 2%.


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?"

I think I have one possible explanation. If the turmoil is significantly impacting Greek productivity - either from a "trust" perspective, as Tyler suggests, or because all of the austerity measures and riots are reducing the ability of existing workers to be productive*, and thus costs go up, then either domestic prices go up or Greeks need to substitute towards potentially more expensive imports. This should be particularly important if Greece were far from operating at capacity anyway or if the lion's share of Greek production costs are variable. 

I have no evidence, just trying to think structurally.

*note that this, in and of itself, is not a reason to oppose austerity. It's just one of the "benefits" that should be incorporated into the cost-benefit evaluation of the cut. 

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