It has been said that the recent decline in European inflation to a large extent is due to a positive supply shock. This is to some extent correct and it is something I have acknowledged on a number of occassions. However, the main deflationary problem comes from the demand side of the European economy and the fact that monetary policy remains extremely tight in the euro zone is the main cause of the deflationary pressures in the European economy. A simple (but incomplete) way to strip out supply side effects from the price level is to look at the GDP deflator. This is what I here have done for Greece. This is the horror graph of the day – it is the level of the Greek GDP deflator relative to the pre-crisis trend (2000-7).
I challenge my readers to find ANY example from history where such a collapse in the price level has ended in anything else than tears. PS note that there are no signs of inflationary pressures in the Greek economy escalating prior to the crisis. This is not about imbalances, but about a negative monetary policy shock.
Justin Irving
/ December 16, 2013It is remarkable how long it took the Greek price level to ‘catch up’ with the 2008 and 2009 demand shocks.
dajeeps
/ December 17, 2013Great post. I’d hit the “like” button, but it’s a horrifying tale of monetary malpractice.
Johannes Fritz
/ December 17, 2013The transatlantic disconnect:
The Fed hesitates tightening mainly because inflation is projected 1.1.-1.2% for 2013, 1.3-1.8% for 2014 and 1.6-2% in 2015.
The ECB sees its policy stance confirmed expecting 1.4% in 2013, 1.1 % in 2014 and 1.5% in 2015.
Benjamin Cole
/ December 17, 2013And just how should a Greek citizen vote for a better monetary policy?
This is awful–Greeks, please leave the EU and get your own central bank as quickly as possible, and print drachmas to the moon.
Yes, lower taxes and shrink government too. Actually, if you just collected some taxes….
Chris Mahoney
/ December 18, 2013See Eichengreen’s most recent piece in Project Syndicate.