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Sacrifice Ratios with Long-Lived Effects

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  • Lawrence Huiyan Zhang
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    Abstract

    This paper contains a theoretical and empirical study of sacrifice ratios with long-lived effects including possible strong persistence effects or even hysteresis effects The empirical analysis is based on G-7 quarterly output data as well as unemployment data from 1960 to 1999 In this paper I develop some new methods to measure sacrifice ratios with long-lived effects I reach four conclusions: First sacrifice ratios with long-lived effects are larger than sacrifice ratios that do not account for long-lived effects Second from a theoretical model and simulation the standard method of measuring sacrifice ratios by Ball (1994) has a larger downward bias for countries with larger long-lived effects Third both random and fixed effect models show that there is a negative relationship between sacrifice ratios and initial inflations which can provide one explanation of the large magnitude of sacrifice ratios with long-lived effects in the 1990s compared with other periods Fourth there is no significant negative relationship between sacrifice ratios with long-lived effects and nominal wage rigidities

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    Bibliographic Info

    Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 446.

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    Date of creation: Apr 2001
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    Handle: RePEc:jhu:papers:446

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    1. John M. Roberts & Norman J. Morin, 1999. "Is hysteresis important for U.S. unemployment?," Finance and Economics Discussion Series 1999-56, Board of Governors of the Federal Reserve System (U.S.).
    2. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
    3. Thomas Jordan, 1997. "Disinflation costs, accelerating inflation gains, and central bank independence," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(1), pages 1-21, March.
    4. Dolado, Juan J. & López-Salido, J David, 1996. "Hysteresis and Economic Fluctuations (Spain, 1970-94)," CEPR Discussion Papers 1334, C.E.P.R. Discussion Papers.
    5. N. Gregory Mankiw, 1990. "A Quick Refresher Course in Macroeconomics," NBER Working Papers 3256, National Bureau of Economic Research, Inc.
    6. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
    7. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
    8. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
    9. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Laurence Ball, 1999. "Aggregate demand and Long-Run Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 189-252.
    11. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
    12. Boschen, John F. & Weise, Charles L., 2001. "The Ex Ante Credibility of Disinflation Policy and the Cost of Reducing Inflation," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 323-347, July.
    13. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Working Papers 4765, National Bureau of Economic Research, Inc.
      • Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80 National Bureau of Economic Research, Inc.
    14. W. Wascher & Palle S. Andersen, 1999. "Sacrifice ratios and the conduct of monetary policy in conditions of low inflation," BIS Working Papers 82, Bank for International Settlements.
    15. Guy Debelle, 1996. "The Ends of Three Small Inflations: Australia, New Zealand and Canada," Canadian Public Policy, University of Toronto Press, vol. 22(1), pages 56-78, March.
    16. Posen, Adam, 1998. "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 335-59, July.
    17. Laurence Ball, 1996. "Disinflation and the NAIRU," NBER Working Papers 5520, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Marc Hofstetter, 2004. "Disinflations in Latin America and the Caribbean: A Free Lunch?," Economics Working Paper Archive 506, The Johns Hopkins University,Department of Economics.
    2. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.

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