A temporary reduction in VAT would have a limited impact on inflation, whereas if the measure is accompanied by structural reforms, the decline in inflation would be significant and sustainable, according to a study conducted by the Bank of Greece and published in the latest issue of its Economic Bulletin released on Thursday.
As noted by economists Georgios Paleodimos and Dimitris Papageorgiou, who conducted the study, “ the effectiveness of an isolated, temporary VAT reduction as a measure to curb inflation in the Greek economy is significantly limited. In contrast, a substantial and lasting decline in inflation is observed when the VAT reduction is accompanied by structural measures that strengthen competition in product and service markets and reduce economic distortions.”
Furthermore, permanent VAT reductions prove to be more effective than temporary ones, as they enhance the credibility of economic policy and positively influence the expectations of households and businesses.
The general conclusion of the study is that a VAT reduction, by itself, is not sufficient as a tool for easing inflationary pressures in the Greek economy, as its effectiveness depends on the broader institutional and structural environment. Therefore, for VAT to be used effectively as a disinflationary policy tool, it must be part of a wider economic policy framework that includes complementary structural interventions aimed at enhancing competition in product and service markets and reducing distortions in the economy.