Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability

31 Pages Posted: 18 Feb 2015

See all articles by Ansgar Hubertus Belke

Ansgar Hubertus Belke

University of Duisburg-Essen - Department of Economics and Business Administration; IZA Institute of Labor Economics; Centre for European Policy Studies

Tobias Böing

European University Viadrina Frankfurt (Oder)

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

Belke, Ansgar Hubertus and Böing, Tobias, Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability (November 16, 2014). Ruhr Economic Paper No. 520, Available at SSRN: https://ssrn.com/abstract=2565729 or http://dx.doi.org/10.2139/ssrn.2565729

Ansgar Hubertus Belke (Contact Author)

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for European Policy Studies ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

Tobias Böing

European University Viadrina Frankfurt (Oder) ( email )

Grosse Scharrnstr. 59
Frankfurt (Oder), Brandenburg 15230
Germany

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