The Impact of Exogenous Shocks on the Dynamics and Persistence of Inflation: A Macroeconomic Model-Based Approach for Greece

Abstract

The paper analyses the dynamic response of inflation to various economic shocks and investigates the sources of inflation persistence through a set of counter factual simulations. Analysis shows that inflation seems to be more persistent in Greece than, on average, in Euro Area. Inflation persistence tends to be higher in response to fiscal shocks than others shocks. Only an indirect tax shock could be classified as “non-persistent” for Greece. Inflation persistence is crucially affected by the degree of competition in product market and it is mainly of intrinsic nature while nominal rigidities and frictions in the labor market do not seem important in explaining the relatively higher persistence of Greek inflation.

Keywords: Inflation persistence, macroeconomic models, impulse response function

JEL Classification: C53, E31, E52