What Determines the Sacrifice Ratio?

Laurence Ball

NBER Working Paper No. 4306
Issued in March 1993
NBER Program(s):   EFG   ME

This paper investigates the determinants of the "sacrifice ratio" for disinflation: the ratio of the loss in output to the fall in trend inflation. I develop a method for estimating the sacrifice ratio in individual disinflation episodes, and apply it to 65 episodes in moderate-inflation OECD countries. In this sample. the sacrifice ratio is decreasing in the speed of disinflation: cold turkey is less costly than gradualism. The ratio is also decreasing in the flexibility of wage-setting institutions. The openness of the economy has no effect on the ratio. and the effects of incomes policies and the initial level of inflation are unclear.

(1222 K)

Published:

• Monetary Policy, ed. N.G. Mankiw, University of Chicago Press, 1994 ,
• What Determines the Sacrifice Ratio?, Laurence Ball, in Monetary Policy (1994), The University of Chicago Press
  

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