2. Modern Literature about the Phillips Curve

Recent research shows that fluctuations in core inflation could be explained by expected inflation, the output gap and the pass-through of movements in headline inflation (Ball and Mazumder Reference Ball and Mazumder2020), while many economists and organizations support that the Phillips Curve has flattened or even disappeared (Dotsey et al. Reference Dotsey, Fujita and Star2017; IMF 2013). More specifically, economists support that the flattening is evident in the baseline ‘structural’ new-Keynesian Phillips curve (Kuttner and Robinson Reference Kuttner and Robinson2010), while results do not lend support to the view that the flattening of the Phillips curve is due to globalization (Gaiotti Reference Gaiotti2010).

In addition, researchers support that inflation expectations have been fully ‘shock-anchored’ since the 1980s (Ball and Mazumder Reference Ball and Mazumder2011). In other words, they support that the effect of unemployment on inflation, for a given level of expected inflation, decreased until the early 1990s (Blanchard et al. Reference Blanchard, Cerutti and Summers2015), but the US Phillips curve is alive (Gordon Reference Gordon2013).

Furthermore, economists suggest that a simple rule with an explicit inflation goal could serve as a useful benchmark for avoiding the recurrence of the Great Inflation (Levin and Taylor Reference Levin and Taylor2013).

In addition, a group of economists support that inflation follows a seemingly exogenous process, unrelated to measures of slack (Stock and Watson Reference Stock and Watson2007; Forbes et al. Reference Forbes, Kirkham and Theodoridis2017) while NAIRU forecasts are not accurate (Atkeson and Ohanian Reference Atkeson and Ohanian2001). In the same way, a recent study supports that a large set of Phillips curve models cannot account for the weakness in underlying inflation between mid-2017 and 2019 (ECB 2019).

Regarding the ECB, it adopted a package of mutually reinforcing monetary policy measures during the crisis, such as pushing the policy rate into negative territory, forward guidance on the future policy path, asset purchase programmes (APPs), targeted longer-term refinancing operations (TLTROs), and quantitative easing (QE), in order to boost the European economy’s growth (Lane Reference Lane2019) and reduce unemployment, although these monetary measures led to a low economic recovery (Vamvakidis Reference Vamvakidis, Thomakos, Monokroussos and Nikolopoulos2015), with the monetary policy effectiveness being dependent on countries’ financial, fiscal and market structure (Filiz Baştürk Reference Filiz Baştürk2013). In addition, economists support that more research is needed on the transmission of negative rates and their financial stability repercussions (Beyer et al. Reference Beyer, Cœuré and Mendicino2017). Monetary easing policy measures, such as the QE, help countries to meet their debt service obligations, but were not adopted in a timely manner, thus they had limited effects on inflation, GDP and sovereign spreads (Driffill Reference Driffill2016). Moreover, the ECB could take on the crucial role as a lender of last resort in order to reduce the economic fragility of the eurozone (De Grauwe Reference De Grauwe2012) and place equal emphasis on the inflation objective compared with the financial stability objective (De Grauwe and Gros Reference De Grauwe and Gros2009), since the contractionary monetary policy followed by the ECB ignited the economic crisis (Jensen Reference Jensen2016). Furthermore, there was a deviation between the monetary policy goals and the developments in prices, interest rates and economic growth (Rodríguez et al. Reference Rodríguez, Campello, Varela-Candamio and Pateiro-López2016). Finally, enhanced forms of forward guidance, which comprise negative policy rates, a large asset purchase programme and targeted long-term loans to banks, could help the EMU to halt persistent disinflation in the post-crisis era (Rostagno et al. Reference Rostagno, Altavilla, Carboni, Lemke, Motto, Guilhe and Yiangou2019), while unconventional monetary policy measures are effective in mitigating the downside risks to price stability (Ciccarelli and Osbat Reference Ciccarelli and Osbat2017).

3. The Economic Policy in Greece during the Crisis

The fiscal policy followed by Greece over the economic crisis years was restrictive (Monokroussos Reference Monokroussos2015; Papadamou and Tzivinikos Reference Papadamou and Tzivinikos2017), resulting in a widening recession and a rise in unemployment (Gechert and Rannenberg Reference Gechert and Rannenberg2015), since high debt levels reduced the government’s ability to use public expenditure in order to stabilize the economy (Papadimos Reference Papadimos2011), for this reason was called on to provide assistance to the financial sector (Caruso et al. Reference Caruso, Reichlin and Ricco2019). The banking crisis and the increase in non-performing-loans (NPLs), in turn, had additional negative effects on unemployment and inflation (Mazreku et al. Reference Mazreku, Morina, Misiri, Spiteri and Grima2018).

A primary goal of the EAPs was fostering price competitiveness, through an improved current account balance (Hazakis Reference Hazakis2017) and lower unit labour costs (Ioannides and Pissarides Reference Ioannides and Pissarides2015), and balancing twin deficits (Gibson et al. Reference Gibson, Hall and Tavlas2012), without any emphasis being placed on the non-wage cost, which is a crucial international trade factor (Athanasoglou and Bardakas Reference Athanasoglou and Bardakas2010). According to the perspective of the EAPs, the Greek economy’s problem was mainly a supply-side problem and, as a result, the promoted reforms focused on wage-cost reduction measures and structural changes in the labour relations and the product and service market (Bruno Reference Bruno1982). Price competitiveness was considered a key goal for achieving economic progress and improving balance of payment (Bobeica et al. Reference Bobeica, Christodoulopoulou and Tkačevs2016). Added to that, Greece faced deflation during the crisis, which put additional pressure on unemployment (Anastasatos and Stamatiou Reference Anastasatos and Stamatiou2014; Karanasos et al. Reference Karanasos, Koutroumpis, Hatgioannides, Karanassou and Sala2017). In addition, it is argued that some reforms set conflicting objectives, which increases unemployment (Liargovas and Psychalis Reference Liargovas and Psychalis2019) and underlined the existence of a Wage Phillips Curve (Orlandi et al. Reference Orlandi, Roeger and Thum-Thyse2018).

By contrast, the related literature argues that both the current account balance (Collignon and Esposito Reference Collignon and Esposito2013) and unit labour costs (Felipe and Kumar Reference Felipe and Kumar2011) are not competitiveness indicators. Moreover, during a recession period, a business-cycle related domestic demand increase may have a bigger contribution to economic growth than an emphasis on the current account balance improvement (Comunale and Hesse Reference Comunale and Hesse2014), whereas the adoption of austerity measures may lead to a slower economic growth (Bianchi et al. Reference Bianchi, Comin, Kung, Kind and Matusche2019). Furthermore, it is noted that Greek enterprises tried to address the demand reduction problem through wage cuts (Kosma et al. Reference Kosma, Papapetrou, Pavlou, Tsochatzi and Zioutou2017), with the internal devaluation not leading to a competitiveness boost (Passas and Pierros Reference Passas and Pierros2017), since the EAPs do not produce permanent results in terms of promoting exports (Noorbakhsh and Paloni Reference Noorbakhsh and Paloni1998).

Additionally, both supply and demand problems appear in the case of the Greek economy. The supply problems have been present since 1981, whereas the demand problems were caused later by the austerity and wage cuts (Ioannides and Pissarides Reference Ioannides and Pissarides2015).

Finally, Greece seems to keep a stable relationship with debt crises, having gone bankrupt four times since 1829 (Reinhart and Rogoff Reference Reinhart and Rogoff2011), in addition Greece held the least successful of the euro periphery fiscal devaluation programmes (Petroulakis Reference Petroulakis2017).

4. Methodology

Descriptive statistics, ordinary least squares (OLS) and VAR analysis are employed to examine the relationships between unemployment, as an independent variable, and inflation, as an independent variable, so as to answer the research question. Descriptive statistics are employed to offer an overview and illustrate the development of the indicators and relationships under examination. Regression analysis is employed to examine the correlation between the variables under examination in the group of countries, Greece, Spain, France, Italy, Germany and Portugal. The correlation coefficient between the variables reflects the degree of linear relationship between two variables. The ordinary least squares method is employed to examine the relationships between the variables under examination, monitoring whether independent variables affect dependent variables. VAR analysis was employed for forecasting systems of interrelated time series, as causality tests refers to the ability of one variable to predict or cause the other (Asteriou and Hall Reference Asteriou and Hall2006). Finally, all these tools offer a complete overview of the variables under examination.

5. Data and Estimations

Figure 1 shows that there was a dramatic inflation fall during crisis from 5% to –1.5%, and, respectively, an unemployment increase, from 7% to 27%. Furthermore, Figure 2 shows inflation is negatively correlated with unemployment (Mastromatteo and Rossi Reference Mastromatteo and Rossi2015), since a decrease in inflation appears to be associated with an increase in unemployment (Frangakis Reference Frangakis2015), with the correlation coefficient being –0.83 and the equation expressing the relationship between these two variables being: y = –0.55x + 16.57, i.e. an increase in inflation by 1 percentage point decreases unemployment by 0.55 percentage points. Based on Figure 3, in Greece, the Phillips curve kept flattening during the 1980s, 1990s and 2000s; however, during the last decade its slope steepened sharply, without confirming the Phillips curve hypothesis. Likewise, a negative correlation between inflation and unemployment is also observed in France, Spain, Portugal and Italy, as illustrated in Figure 4, with the exception of Germany which features an almost flat curve.

Figure 1. Unemployment rate and inflation rate.

Source: Bank of Greece

Figure 2. Unemployment rate and inflation rate in Greece.

Source: OECD

Figure 3. Unemployment rate and inflation rate in Greece during in 1980s, 1990s, 2000s and 2010s (to view this figure in colour please see the online version of this journal).

Source: OECD

Figure 4. Unemployment rate and inflation rate in Greece, Spain, Portugal, Germany, Italy and France (to view this figure in colour please see the online version of this journal).

Source: OECD

Table 1 shows that a negative correlation coefficient between inflation and unemployment does not only appear in the case of Greece, but also in the cases of France, Italy, Portugal, Spain and Austria. Moreover, inflation appears to affect unemployment more severely in Spain, with other studies reaching similar conclusions (Hindrayanto et al. Reference Hindrayanto, Samarina and Stanga2019). On the other hand, it seems that inflation is not really correlated to unemployment in Germany.

Table 1. Unemployment and inflation correlation and the linear equation.

Table 2 illustrates the relationship between the dependent variable (i.e. unemployment), and the independent variables (i.e. inflation, unit labour cost, current account balance and long-term borrowing rate). According to the regression, an increase in inflation by 1 basis point decreases unemployment by 1.14 percentage points, which confirms the negative correlation between unemployment and inflation. On the other hand, an increase of the current account balance by 1 basis point increases unemployment by 0.67 percentage points, while an increase in the unit labour cost by 1 percentage point decreases unemployment by 0.35 percentage points. The inverse relationship between Current Account Balance and Unit Labour Cost to unemployment, compared with prevailing literature (Salop and Spitäller Reference Salop and Spitäller1980; Rebitzer Reference Rebitzer1988; Britton Reference Britton1989), is explained by the economic model previously applied in Greece and other Southern European countries, as the constant twin deficits in state budget and current account balance restricted competitiveness, which led to increased unit labour cost, while jobs were linked to consuming and government spending (Busch et al. Reference Busch, Grömling and Matthes2011). Finally, an increase in the long-term borrowing rate by 1 percentage point increases unemployment by 0.35 percentage points. This relation is also confirmed by the literature (Bierens and Broersma Reference Bierens and Broersma1993; Feldmann Reference Feldmann2013).

Table 2. Multivariate regression for Greece.

The negative correlation between unemployment and inflation is also confirmed by the multivariate regressions performed for Italy, Spain, Portugal and Germany, which produced similar results as for Greece for all indicators, as illustrated in multivariate Tables 3 to 6.

Table 3. Multivariate regression for Portugal.

Table 4. Multivariate regression for Spain.

Table 5. Multivariate regression for Italy.

Table 6. Multivariate regression for Germany.

Contrary to the above, Table 7 shows that during 2004–2018, unemployment in Greece was slightly affected by past inflation values, while – apart from the model’s internal factors – other external factors significantly affect the unemployment rate. Therefore, based on VAR Analysis 1, one can conclude that there is a positive, yet weak, relationship between unemployment and past inflation values. In addition, VAR Analyses 2 and 3, which study two different time periods in Greece, reveal a positive relationship between unemployment and past inflation values, for most values, although inflation does not significantly affect unemployment, while in both cases numerous external factors, besides inflation, affect unemployment. It is noted that the remaining variables have the same trend in Multivariate VAR as in Multivariate Regression, while inflation is the only variable differentiating between Multivariate Regression and Multivariate VAR.

Table 7. Vector autoregression estimates.