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An assessment of the impacts of inflation on Greek public finances: macroeconomic effects and policy implications

Author

Listed:
  • Sophia Lazaretou

    (Bank of Greece)

  • George Palaiodimos

    (Bank of Greece)

Abstract

In 2022, the global cost of living surged, pushing already rising global inflation to multi-decade highs. Our empirical analysis assesses the impact of high inflation on Greece’s public finances (in terms of flows), considering the extraordinary economic circumstances arising from the pandemic crisis and the initial phase of the recent energy crisis. To this end, we use a small-scale Bayesian vector autoregressive model for the Greek economy to quantify the effects of an adverse price shock on the primary balance, tax revenue and primary spending (all normalised by nominal GDP), as well as on real output, distinguishing between the effects of a demand- and an external supply-driven shock to inflation. We find that the nature of an inflation shock, i.e. whether it is demand- or supply-driven, is important for correctly identifying the short-to-medium-term effects of inflation shocks on fiscal outcomes.

Suggested Citation

  • Sophia Lazaretou & George Palaiodimos, 2023. "An assessment of the impacts of inflation on Greek public finances: macroeconomic effects and policy implications," Economic Bulletin, Bank of Greece, issue 57, pages 7-24, July.
    • Handle: RePEc:bog:econbl:y:2023:i:57:p:7-24
    DOI: 10.52903/econbull20235701
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    More about this item

    Keywords

    price inflation; public finances; COVID-19 pandemic; energy crisis; Greece; Bayesian Structural VAR;
    All these keywords.

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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