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: 10.4419/86788595

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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 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

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