Sacrifice Ratios with Long‐Lived Effects

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.