Anastasatos, T. & Stamatiou, T. (2014) “Is Deflation a Risk for Greece?, Economy and Markets, Eurobank Research, Vol. IX, Issue 3, April.
Deflation is the occurrence of negative inflation, i.e. the situation in which prices of goods and services are falling in an economy. By contrast, disinflation is a slow-down in the inflation rate. In technical terms, deflation is considered to have occurred when CPI or the GDP deflator has recorded one or two quarters of negative readings. The decline in prices of assets is often referred to as Asset Deflation.
This study explains what are the causes and effects of deflation and, in relation to those, policy options to deal with the phenomenon. Consequently, the nature of deflationary pressures in Greece is analyzed and juxtaposed to explanations proposed in the literature. The situation in Greece is viewed in conjunction with disinflationary trends in the rest of the Eurozone. Vulnerability to longer lasting deflation is questioned. Implications for competitiveness and debt sustainability are explained. The study concludes that, while longer lasting deflation is not established in Greece, evidence is yet inconclusive. Hence, alertness should be maintained. In case deflationary expectations set it, policymakers should act promptly to prevent deflation rather than try to cure it, with monetary policy having a prominent role to play in this.
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