Sacrifice Ratios and Inflation Targeting: The Role of Credibility
Two recent papers (Gonçalves and Carvalho, 2009; and Brito, 2010) hold contradictory views regarding the role of inflation targeting during periods of disinflation. The first paper claims that inflation targeting reduces sacrifice ratios-i.e., the ratio of output losses to the change in trend inflation-during disinflations; the second paper refutes this result. We show here that inflation targeting only matters if disinflations are slow. The credibility gains of a fast disinflation make inflation targeting irrelevant for reducing the output-inflation trade-off.
|Date of creation:||07 Feb 2012|
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