Labour Gap, Output Gap and Inflation by Economic Sector: The case of Greece and the Peloponnese Region (2000-2007)

The present paper estimates potential labour and labour gap as well as potential output and output gap using a Cobb Douglas production function and a Hodrick-Prescott filter. We investigate Greece as well as the Peloponnese Region in Greece by sector of economic activity (2000-2007), with the aid of the Non Accelerating Wage Inflation Rate of Unemployment (N.A.W.R.U.) concept. The results support the idea that both Greece and the Peloponnese seem to be working over the economy’s capabilities a fact which was empirically found to lead to inflationary pressure. Thus, the empirical results of this paper suggest that output gap explains a considerable part of inflation in the Greek economy. In fact, it takes approximately two (2) years for the output gap to cause inflationary pressures in the Greek Economy. Clearly, future research on the subject would be of great interest.