Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability
31 Pages Posted: 18 Feb 2015
Date Written: November 16, 2014
Abstract
The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a structural vector autoregressive technique following Cecchetti and Rich (2001) and, secondly, one by Ball (1994) based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between -1 and 2 percent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.
Keywords: Sacrifice ratio; structural adjustment; Euro area; VAR; episode method; Phillips curve
JEL Classification: E31, F49
Suggested Citation: Suggested Citation