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Sacrifice Ratios with Long-Lived Effects

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  • Lawrence Huiyan Zhang

Abstract

This paper is a theoretical and empirical study of sacrifice ratios-that is, the cost of reducing inflation during periods when disinflation produces long-lived effects on output or unemployment. New methods are developed for measuring sacrifice ratios. Sacrifice ratios that take into account long-lived effects are larger than sacrifice ratios calculated using Ball's (1994) 'standard method'. The 'standard method' also has a larger downward bias for countries experiencing larger long-lived effects. The sacrifice ratio for the United States falls somewhere in the middle of those for G-7 countries when long-lived effects are taken into account, while it is at the top when calculated using the 'standard method'. Finally, there is a negative relationship between sacrifice ratios and initial inflation rates, and the cost of reducing inflation is generally lower when the speed of disinflation is faster. Copyright Blackwell Publishing Ltd. 2005

Suggested Citation

  • Lawrence Huiyan Zhang, 2005. "Sacrifice Ratios with Long-Lived Effects," International Finance, Wiley Blackwell, vol. 8(2), pages 231-262, August.
  • Handle: RePEc:bla:intfin:v:8:y:2005:i:2:p:231-262
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    Cited by:

    1. Ascari, Guido & Ropele, Tiziano, 2012. "Disinflation in a DSGE perspective: Sacrifice ratio or welfare gain ratio?," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 169-182.
    2. Mazumder, Sandeep, 2014. "The sacrifice ratio and core inflation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 400-421.
    3. Mazumder, Sandeep, 2014. "Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries," Economic Modelling, Elsevier, vol. 40(C), pages 117-135.
    4. Danilo José Rodrigues Passos & Pedro Garcia Duarte, 2014. "Reavaliando A Relação Entre Independência Do Banco Central E Custos De Desinflação: Uma Análise De Viés De Seleção," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 040, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Emmanuel De Veirman, 2009. "What Makes the Output-Inflation Trade-Off Change? The Absence of Accelerating Deflation in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1117-1140, September.
    6. Bowdler, Christopher & Nunziata, Luca, 2010. "Labor market structures and the sacrifice ratio," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 816-826, September.
    7. Mazumder, Sandeep, 2017. "Output gains from accelerating core inflation," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 63-74.
    8. Giamattei, Marcus, 2015. "Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    9. Hofstetter, Marc, 2008. "Disinflations in Latin America and the Caribbean: A free lunch?," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 327-345, March.
    10. Zobia BHATTI & Abdul QAYYUM, 2016. "The Cost of Low Inflation in Case of Pakistan," Journal of Economics Library, KSP Journals, vol. 3(2), pages 257-268, June.
    11. Marc Hofstetter, 2007. "Disinflating from moderate inflation in Latin America and Caribbean," COYUNTURA ECONÓMICA, FEDESARROLLO, June.
    12. Ravindra H. Dholakia & Kadiyala Sri Virinchi, 2017. "How Costly is the Deliberate Disinflation in India? Estimating the Sacrifice Ratio," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(1), pages 27-44, March.
    13. Dholakia, Ravindra H. & Kadiyala Sri Virinchi, 2015. "How Costly is the Deliberate Disinflation in India? Estimating the Sacrifice Ratio," IIMA Working Papers WP2015-08-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    14. Coffinet, J., 2006. "Ratios de sacrifice et rigidités sur le marché du travail," Bulletin de la Banque de France, Banque de France, issue 151, pages 59-73.
    15. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
    16. Semmler, Willi & Gross, Marco, 2017. "Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area," Working Paper Series 2004, European Central Bank.
    17. Takashi Senda & Julie K Smith, 2008. "Inflation History And The Sacrifice Ratio: Episode-Specific Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 409-419, July.
    18. Jérôme Coffinet & Céline Poilly, 2009. "Une évaluation structurelle du ratio de sacrifice dans la zone euro," Revue d'économie politique, Dalloz, vol. 119(2), pages 273-299.
    19. Sandeep Mazumder, 2014. "European Monetary Union and the Cost of Disinflation," Economic Issues Journal Articles, Economic Issues, vol. 19(2), pages 1-20, September.
    20. Marc Hofstetter, 2007. "Disinflating From Moderate Inflation," DOCUMENTOS CEDE 002373, UNIVERSIDAD DE LOS ANDES-CEDE.

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