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Structural estimates of the U.S. sacrifice ratio

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  • Stephen G. Cecchetti
  • Robert W. Rich

Abstract

This paper investigates the statistical properties of the U.S. sacrifice ratio -- the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural VAR models and then conduct Monte Carlo simulations to analyze their sampling distribution. While the point estimates of the sacrifice ratio confirm the results reported in earlier studies, we find that the estimates are very imprecise and that the degree of imprecision increases with the complexity of the model used. That is, increases in the number of structural shocks widen our confidence intervals. We conclude that the estimates provide a very unreliable guide for assessing the output cost of a disinflation policy.

Suggested Citation

  • Stephen G. Cecchetti & Robert W. Rich, 1999. "Structural estimates of the U.S. sacrifice ratio," Staff Reports 71, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:71
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    References listed on IDEAS

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    1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    3. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
    4. Jordi GalĂ­, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
    5. A. R. Pagan & J. C. Robertson, 1998. "Structural Models Of The Liquidity Effect," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 202-217, May.
    6. Dornbusch, Rudiger & Fischer, Stanley, 1993. "Moderate Inflation," World Bank Economic Review, World Bank Group, vol. 7(1), pages 1-44, January.
    7. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-352, May.
    8. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    9. Robert J. Barro, 1996. "Inflation and growth," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
    10. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters,in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
    11. Andrew J. Filardo, 1998. "New evidence on the output cost of fighting inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q III.
    12. Taylor, John B, 1983. "Union Wage Settlements during a Disinflation," American Economic Review, American Economic Association, vol. 73(5), pages 981-993, December.
    13. Robert J. Gordon & Stephen R. King, 1982. "The Output Cost of Disinflation in Traditional and Vector Autoregressive Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 205-244.
    14. Jeffrey C. Fuhrer, 1995. "The persistence of inflation and the cost of disinflation," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-16.
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    Keywords

    Inflation (Finance) ; Econometric models ; Monetary policy ; Gross domestic product;

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