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Structural Estimates of the U.S. Sacrifice Ratio

  • Cecchetti, Stephen G
  • Rich, Robert W

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.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 19 (2001)
Issue (Month): 4 (October)
Pages: 416-27

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Handle: RePEc:bes:jnlbes:v:19:y:2001:i:4:p:416-27
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  1. Rudiger Dornbusch & Stanley Fischer, 1991. "Moderate Inflation," NBER Working Papers 3896, National Bureau of Economic Research, Inc.
  2. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
  3. 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.
  4. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
  5. Pagan, A.R. & Robertson, J.C., 1995. "Structural Models of the Liquidity Effect," Papers 283, Australian National University - Department of Economics.
  6. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  9. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
  10. Andrew J. Filardo, 1998. "New evidence on the output cost of fighting inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q III.
  11. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  12. John B. Taylor, 1982. "Union Wage Settlements During a Disinflation," NBER Working Papers 0985, National Bureau of Economic Research, Inc.
  13. 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.
  14. Robert J. Barro, 1996. "Inflation and growth," Review, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
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