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Has the cost of fighting inflation fallen?

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  • Gabriel De Kock
  • Tanya E. Ghaleb

Abstract

During the 1980s, many OECD countries adopted labor-market policies designed to enhance wage flexibility and reduce unemployment. They also attempted to bolster the credibility of their anti-inflation measures through exchange rate and fiscal policies. These measures should have lowered the costs associated with fighting inflation. In this paper, we compare sacrifice ratio measures of the cost of disinflation in the most recent OECD recession with measures for the mid-seventies and early-eighties recessions. Surprisingly, in the overwhelming majority of OECD countries, the cost of reducing inflation has increased rather than declined. This conclusion stands, even if we take into account that it may be more expensive to fight inflation at lower inflation rates.

Suggested Citation

  • Gabriel De Kock & Tanya E. Ghaleb, 1996. "Has the cost of fighting inflation fallen?," Research Paper 9606, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednrp:9606
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    References listed on IDEAS

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    1. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
    2. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    3. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
    4. John P. Judd, 1995. "Inflation goals and credibility," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may12.
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    Cited by:

    1. Nishizaki, Kenji & Watanabe, Tsutomu, 2000. "Output-Inflation Trade-Off at Near-Zero Inflation Rates," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 304-326, December.

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