Drivers of inflation in the Greek economy

Abstract

One of the hallmark achievements of modern central banking has been to quell high inflation. However, after over two decades of low inflation, a series of shocks, including the pandemic recession, supply bottlenecks, highly accommodative policy, and, perhaps most saliently, the war in Ukraine, have led to multi-decade inflation highs across most advanced economies. Understanding the ultimate causes of this inflation surge is vital for the proper design of policy, yet disentangling the various shocks is hard, particularly when they affect prices in the same direction. In this paper, we apply the novel shock decomposition framework of Shapiro (2022) to Greek data and estimate the contribution of supply and demand shocks to inflation developments over the recent episode, as well as for the 2001-2019 period. For the recent episode, we find that supply forces were slightly more important for headline inflation, but much more important for underlying inflation.