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What Determines the Sacrifice Ratio?

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  • Laurence Ball

Abstract

This paper investigates the determinants of the "sacrifice ratio" for disinflation: the ratio of the loss in output to the fall in trend inflation. I develop a method for estimating the sacrifice ratio in individual disinflation episodes, and apply it to 65 episodes in moderate-inflation OECD countries. In this sample. the sacrifice ratio is decreasing in the speed of disinflation: cold turkey is less costly than gradualism. The ratio is also decreasing in the flexibility of wage-setting institutions. The openness of the economy has no effect on the ratio. and the effects of incomes policies and the initial level of inflation are unclear.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4306.

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Date of creation: Mar 1993
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Publication status: published as Monetary Policy, ed. N.G. Mankiw, University of Chicago Press, 1994
Handle: RePEc:nbr:nberwo:4306

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  1. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  2. Mankiw, N Gregory, 1990. "A Quick Refresher Course in Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 28(4), pages 1645-60, December.
  3. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  4. Grubb, David B. & Jackman, Richard & Layard, Richard, 1983. "Wage rigidity and unemployment in OECD countries," European Economic Review, Elsevier, vol. 21(1-2), pages 11-39.
  5. Ball, Laurence Markham, 1987. "Externalities from Contract Length," American Economic Review, American Economic Association, vol. 77(4), pages 615-29, September.
  6. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  7. John B. Taylor, 1982. "Union Wage Settlements During a Disinflation," NBER Working Papers 0985, National Bureau of Economic Research, Inc.
  8. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
  9. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  10. 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.
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