An Assessment of the Impacts of Inflation on Greek Public Finances : Macroeconomic Effects and Policy Implications

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