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Sacrifice ratio dispersion within the Euro Zone:What can be learned about implementing a Single Monetary Policy?

  • Marilyne Huchet-Bourdon

    ()

    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)

  • Jean-Jacques Durand

    ()

    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)

  • Julien Licheron

    ()

    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)

This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse.

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Paper provided by HAL in its series Post-Print with number halshs-00143793.

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Date of creation: 30 Sep 2008
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Publication status: Published, International Review of Applied Economics, 2008, 22, 5, 601-621
Handle: RePEc:hal:journl:halshs-00143793
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00143793/en/
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