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Structural Estimates of the U.S. Sacrifice Ratio

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  • Cecchetti, Stephen G
  • Rich, Robert W

Abstract

This article investigates the statistical properties of the U.S. sacrifice ratio--the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural vector autoregression models and then conduct a series of simulation exercises to analyze their sampling distribution. We obtain point estimates of the sacrifice ratio that are consistent with results reported in earlier studies. However, the estimates are very imprecise, which we suggest reflects the poor quality of instruments used in estimation. We conclude that the estimates provide a very unreliable guide for assessing the output cost of disinflation policy.

Suggested Citation

  • Cecchetti, Stephen G & Rich, Robert W, 2001. "Structural Estimates of the U.S. Sacrifice Ratio," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 416-427, October.
  • Handle: RePEc:bes:jnlbes:v:19:y:2001:i:4:p:416-27
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    1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    3. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
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    7. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-352, May.
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    10. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
    11. Andrew J. Filardo, 1998. "New evidence on the output cost of fighting inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q III.
    12. Taylor, John B, 1983. "Union Wage Settlements during a Disinflation," American Economic Review, American Economic Association, vol. 73(5), pages 981-993, December.
    13. Robert J. Gordon & Stephen R. King, 1982. "The Output Cost of Disinflation in Traditional and Vector Autoregressive Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 205-244.
    14. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
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