Ruhr Economic Papers
Ruhr Economic Papers #520
Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability
by Ansgar Belke and Tobias Böing
UDE, 11/2014, 29 S./p., 8 Euro, ISBN 978-3-86788-595-9 DOI: 10.4419/86788595download
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 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.
JEL-Classification: E31, F49
Keywords: Sacrifice ratio; structural adjustment; Euro area; VAR; episode method; Phillips curve