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High inflation and the sacrifice ratio

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  • Mazumder, Sandeep

    () (Department of Economics, Wake Forest University, USA)

Abstract

A vast literature exists that measures the amount of real GDP that is lost when trend inflation is lowered by a percentage point, known as the sacrifice ratio. Ball (1994)’s episodic method of selecting disinflation episodes and calculating the sacrifice ratio is the most widely-used method of measuring these output costs of disinflation. However, this method constrains the disinflation episodes to be ones where trend inflation at the start of an episode is low or moderate. All cases of high inflation, and even hyperinflations, are automatically discarded in the literature. This paper seeks to address what happens if we do not discard the disinflation episodes in cases where inflation is “high.” We find that the sacrifice ratio is much lower when considering cases of high inflation. Moreover, we find that the speed of disinflation has no significant effect on high inflation sacrifice ratios, but trade openness does have a highly negative and significant impact. Furthermore, the evidence indicates that greater trade openness enhances the credibility bonus that can be achieved with more central bank independence in economies that have high inflation.

Suggested Citation

  • Mazumder, Sandeep, 2013. "High inflation and the sacrifice ratio," European Economic Letters, European Economics Letters Group, vol. 2(2), pages 71-76.
  • Handle: RePEc:ris:eueclt:0018
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    File URL: http://eelet.org.uk/EEL2(2)71-76.pdf
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    Cited by:

    1. Sandeep Mazumder, 2014. "European Monetary Union and the Cost of Disinflation," Economic Issues Journal Articles, Economic Issues, vol. 19(2), pages 1-20, September.

    More about this item

    Keywords

    Inflation; Sacrifice ratios; Disinflation; Hyperinflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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