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Sacrifice Ratios for Euro Area Countries: New Evidence on the Costs of Price Stability

Listed author(s):
  • Ansgar Belke
  • Tobias Böing

type="main" xml:lang="en"> The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a structural vector autoregressive technique following Cecchetti and Rich and, secondly, one by Ball based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between −1 and 2 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.

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Article provided by The University of Melbourne, Melbourne Institute of Applied Economic and Social Research in its journal Australian Economic Review.

Volume (Year): 47 (2014)
Issue (Month): 4 (December)
Pages: 455-471

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Handle: RePEc:bla:ausecr:v:47:y:2014:i:4:p:455-471
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  1. Ansgar Belke & Gunther Schnabl, 2013. "Four Generations of Global Imbalances," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 1-5, February.
  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. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  5. Holger Zemanek & Ansgar Belke & Gunther Schnabl, 2010. "Current account balances and structural adjustment in the euro area," International Economics and Economic Policy, Springer, vol. 7(1), pages 83-127, May.
  6. repec:zbw:rwirep:0176 is not listed on IDEAS
  7. Ansgar Belke & Christian Dreger, 2013. "Current Account Imbalances in the Euro Area: Does Catching up Explain the Development?," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 6-17, February.
  8. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
  9. Ansgar Belke & Bernhard Herz & Lukas Vogel, 2007. "Reforms, Exchange Rates and Monetary Commitment: A Panel Analysis for OECD Countries," Open Economies Review, Springer, vol. 18(3), pages 369-388, July.
  10. Coffinet, G. & Matheron, J. & Poilly, C., 2007. "Estimating the sacrifice ratio for the euro area," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 08, pages 5-34, Summer.
  11. Juncal Cunnado & Fernando PErez De Gracia, 2003. "Sacrifice Ratios: Some lessons from EMU countries, 1960-2001," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(3), pages 327-337.
  12. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
  13. Jean-Jacques Durand & Marilyne Huchet-Bourdon & Julien Licheron, 2008. "Sacrifice ratio dispersion within the Euro Zone: what can be learned about implementing a single monetary policy?," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(5), pages 601-621.
  14. Gros, Daniel & Alcidi, Cinzia & Belke, Ansgar & Coutinho, Leonor & Giovannini, Alessandro, 2014. "State-of-play in implementing macroeconomic adjustment programmes in the euro area," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100407, Verein für Socialpolitik / German Economic Association.
  15. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  16. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
  17. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
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