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Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues

  • Willem H. Buiter
  • Marcus H. Miller

This paper analyses how the output or unemployment cost of achieving a sustainable reduction in the rate of inflation depends on the structure of the wage-price process and how the "sacrifice ratio" can be minimized. In models where the natural rate is invariant under the anti-inflationary policies, price level inertia is not sufficient for a positive sacrifice ratio. Without sluggishness in the core inflation rate, a zero sacrifice ratio can be achieved simply through intelligent demand management. With sluggish core inflation, the sacrifice ratio is positive unless intelligent demand management is complemented by cost-reducing fiscal measures o reffective incomes policy. Letting the exchange rate float does not reduce the sacrifice ratio. If core inflation is partly backward-looking and partly forward-looking, current core inflation may be a function of current and past expectations of future recessions. Conventional sacrifice ratio calculations ignore forward-looking aspects of behaviour and may therefore underestimate the true cost of disinflation. If there is hysteresis in the natural rate (e.g. through a gradual adjustment of the natural rate towards the actual rate) and if there is sluggish core inflation, the sacrifice ratio will become infinite.Whenever sluggish core inflation is present, credibility of the anti-inflationary (monetary) policy alone cannot obviate a positive sacrifice ratio.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1252.

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Date of creation: Dec 1983
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Publication status: published as Buiter, Willem H. and Marcus H. Miller. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues." Inflation and Unemployment: Theory, Experience and Policy Making, edited by Victor Argy and John Nevile, pp . 11-38. London: George Allen & Unwin, Ltd., 1985.
Handle: RePEc:nbr:nberwo:1252
Note: ITI IFM
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  1. Hargreaves Heap, S P, 1980. "Choosing the Wrong 'Natural' Rate: Accelerating Inflation or Decelerating Employment and Growth?," Economic Journal, Royal Economic Society, vol. 90(359), pages 611-20, September.
  2. Willem H. Buiter & Marcus Miller, 1983. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation: Some Further Results," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 317-368 National Bureau of Economic Research, Inc.
  3. Buiter, Willem H & Jewitt, Ian, 1981. "Staggered Wage Setting with Real Wage Relativities: Variations on a Theme of Taylor," The Manchester School of Economic & Social Studies, University of Manchester, vol. 49(3), pages 211-28, September.
  4. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
  5. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  6. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(2), pages 85-123.
  7. Dennis W. Carlton, 1982. "The Disruptive Effect of Inflation on the Organization of Markets," NBER Chapters, in: Inflation: Causes and Effects, pages 139-152 National Bureau of Economic Research, Inc.
  8. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(1), pages 171-196.
  9. Willem H. Buiter, 1981. "The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations," NBER Technical Working Papers 0009, National Bureau of Economic Research, Inc.
  10. Willem H. Buiter, 1983. "Optimal and Time-Consistent Polices in Continuous Time Rational Expectations Models," NBER Technical Working Papers 0029, National Bureau of Economic Research, Inc.
  11. Buiter, W, 1982. "Saddlepoint Problems in Continuous Time Rational Expectations Models : A General Method and Some Macroeconomic Examples," The Warwick Economics Research Paper Series (TWERPS) 200, University of Warwick, Department of Economics.
  12. Gregory, R G, 1982. "Work and Welfare in the Years Ahead," Australian Economic Papers, Wiley Blackwell, vol. 21(39), pages 219-43, December.
  13. Willem H. Buiter & Mark Gersovitz, 1981. "Issues in Controllability and the Theory of Economic Policy," NBER Technical Working Papers 0002, National Bureau of Economic Research, Inc.
  14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  15. repec:cup:cbooks:9780521068659 is not listed on IDEAS
  16. Willem H. Buiter & Marcus H. Miller, 1980. "Monetary Policy and International Competitiveness," NBER Working Papers 0591, National Bureau of Economic Research, Inc.
  17. Hall, Robert E., 1976. "The Phillips curve and macroeconomic policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 127-148, January.
  18. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
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