Tyler Cowen writes,
Prices are sticky, AD is falling, and almost all of the adjustment is in quantities. Yet this still doesn’t explain why prices are inching up, and furthermore it is grossly at variance with the actual empirical literature on price stickiness (much neglected in the blogosphere I should add), which is not nearly as strong as wage stickiness.
This is one of several explanations Tyler finds unsatisfactory for the fact that unemployment is so high in Greece and yet inflation is still greater than zero there. In a follow-up, he writes,
For a simple point of comparison, the rate of U.S. price deflation in 1932 was greater than ten percent with overall deflation running at about twenty-five percent over a period of a few years. More recently, Japan had nine straight years of core CPI deflation and Greece cannot even manage anything close to that. Just what is the Greek Phillips Curve supposed to look like?
I recommend a recent article by Marga Peeter and Ard den Reijer. I may be confused about what I am reading, but it appears to me that the Phillips Curve in Greece shifted adversely over a period of a decade. To put this another way, the natural rate of unemployment in Greece may be quite high.
If my reading is correct, then aggregate demand policies, including converting to a cheaper currency, would not do much for Greece. If workers’ reservation wages are high relative to productivity, you are going to have a lot of unemployment.