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Determinants of the Sacrifice Ratio: Evidence from OECD and non-OECD countries

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This paper measures sacrifice ratios for all countries in the world over an approximately forty year time period, in addition to exploring the determinants of worldwide sacrifice ratios. We test the most commonly-cited determinants: the speed of disinflation, openness, central bank independence, inflation targeting, and political factors for both OECD and non-OECD countries. We find that the speed of disinflation is the most important determinant of OECD sacrifice ratios, but puzzlingly has no effect on non-OECD nations’ disinflation costs. Instead we find evidence that greater central bank independence and more openness are associated with lower non-OECD sacrifice ratios. We also find that the ratio of government debt to GDP–a variable that is not important when it comes to OECD countries–is highly significant for non-OECD economies. Specifically, we find that higher indebtedness is associated with lower sacrifice ratios in non-OECD nations, suggesting that greater levels of debt do not lead to higher expectations of inflation.

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Paper provided by Wake Forest University, Economics Department in its series Working Papers with number 106.

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Length: 41 pages
Date of creation: 10 Sep 2012
Handle: RePEc:ris:wfuewp:0106
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Web page: http://www.wfu.edu/academics/economics/

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  1. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
  2. Lawrence Huiyan Zhang, 2005. "Sacrifice Ratios with Long-Lived Effects," International Finance, Wiley Blackwell, vol. 8(2), pages 231-262, 08.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
  5. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 1-10, December.
  6. Alex Cukierman, 2002. "Does a Higher Sacrifice Ratio Mean that Central Bank Independence is Excessive?," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 1-25, May.
  7. Dany Jaimovich & Ugo Panizza, 2010. "Public debt around the world: a new data set of central government debt," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 19-24, January.
  8. Barbara Caporale & Tony Caporale, 2008. "Political Regimes and the Cost of Disinflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1541-1554, October.
  9. Thomas Jordan, 1997. "Disinflation costs, accelerating inflation gains, and central bank independence," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(1), pages 1-21, March.
  10. Giuseppe Diana & Mose Sidiropoulos, 2004. "Central Bank Independence, Speed of Disinflation and the Sacrifice Ratio," Open Economies Review, Springer, vol. 15(4), pages 385-402, October.
  11. Christopher Crowe & Ellen E. Meade, 2007. "Central Bank Independence and Transparency: Evolution and Effectiveness," Working Papers 2007-20, American University, Department of Economics.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  13. Ricardo D. Brito, 2010. "Inflation Targeting Does Not Matter: Another Look at OECD Sacrifice Ratios," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1679-1688, December.
  14. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-379, April.
  15. Marc Hofstetter, 2006. "Disinflations In Latin America And The Caribbean: A Free Lunch?," DOCUMENTOS CEDE 002375, UNIVERSIDAD DE LOS ANDES-CEDE.
  16. Chortareas, Georgios & Stasavage, David & Sterne, Gabriel, 2002. "Monetary Policy Transparency, Inflation and the Sacrifice Ratio," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(2), pages 141-155, April.
  17. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, vol. 108(448), pages 703-725, May.
  18. Laurence Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," NBER Working Papers 9577, National Bureau of Economic Research, Inc.
  19. Harold Brumm & Richard Krashevski, 2003. "The Sacrifice Ratio and Central Bank Independence Revisited," Open Economies Review, Springer, vol. 14(2), pages 157-168, April.
  20. Carlos Eduardo S. Gonçalves & Alexandre Carvalho, 2009. "Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 233-243, 02.
  21. J. Benson Durham, 2001. "Sacrifice ratios and monetary policy credibility: do smaller budget deficits, inflation-indexed debt, and inflation targets lower disinflation costs?," Finance and Economics Discussion Series 2001-47, Board of Governors of the Federal Reserve System (U.S.).
  22. Bowdler, Christopher, 2009. "Openness, exchange rate regimes and the Phillips curve," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 148-160, February.
  23. Takashi Senda & Julie K Smith, 2008. "Inflation History And The Sacrifice Ratio: Episode-Specific Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 26(3), pages 409-419, 07.
  24. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  25. Daniels, Joseph P. & VanHoose, David D., 2013. "Exchange-rate pass through, openness, and the sacrifice ratio," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 131-150.
  26. Razin, Assaf & Yuen, Chi-Wa, 2001. "The 'New Keynesian' Phillips Curve: Closed Economy versus Open Economy," CEPR Discussion Papers 3083, C.E.P.R. Discussion Papers.
  27. Temple, Jonathan, 2002. "Openness, Inflation, and the Phillips Curve: A Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 450-468, May.
  28. Brito, Ricardo D., 2010. "Inflation Targeting Does Not Matter: Another Look at OECD Economies’ Output Sacrifice Ratios," Insper Working Papers wpe_212, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  29. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  30. Mark R. Stone, 2003. "Inflation Targeting Lite," IMF Working Papers 03/12, .
  31. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank.
  32. Carl E. Walsh, 1995. "Output-inflation tradeoffs and central bank independence," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep22.
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