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A Benefit-Cost Analysis Of Disinflation

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  • CHRISTOPHER J. NEELY
  • CHRISTOPHER J. WALLER

Abstract

This paper contains a benefit-cost analysis of disinflation. The analysis measures the costs of disinflation by "sacrifice ratios"-the output lost during a disinflation-induced recession. The benefits of disinflation are from recent research that associates lower inflation with higher GDP growth rates. The analysis calculates sacrifice ratios and the growth effects of disinflation and critiques the methods that economists typically use to calculate these benefits and costs. The estimates are quite fragile but nevertheless show that the lost output from a disinflation-induced recession typically will be recouped in 10 to 15 years. Copyright 1997 Western Economic Association International.

Suggested Citation

  • Christopher J. Neely & Christopher J. Waller, 1997. "A Benefit-Cost Analysis Of Disinflation," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 50-64, January.
  • Handle: RePEc:bla:coecpo:v:15:y:1997:i:1:p:50-64
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.1997.tb00454.x
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    References listed on IDEAS

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    1. Milton H. Marquis & Tor Einarsson, 1994. "Optimal disinflation paths when growth is endogenous," Finance and Economics Discussion Series 94-32, Board of Governors of the Federal Reserve System (US).
    2. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    3. David Mayes & Bryan Chapple, 1995. "The costs and benefits of disinflation: a critique of the sacrifice ration," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 58, March.
    4. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-353, July.
    5. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
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    Cited by:

    1. Michael R. Pakko, 1998. "Shoe-leather costs of inflation and policy credibility," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 37-50.
    2. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    3. 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.
    4. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 16(1), pages 157-173, May.

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