Structural Estimates of the U.S. Sacrifice Ratio

33 Pages Posted: 9 Aug 1999

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Robert W. Rich

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: March 1999

Abstract

This paper investigates the statistical properties of the U.S. sacrifice ratio--the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural VAR models and then conduct Monte Carlo simulations to analyze their sampling distribution. While the point estimates of the sacrifice ratio confirm the results reported in earlier studies, we find that the estimates are very imprecise and that the degree of imprecision increases with the complexity of the model used. That is, increases in the number of structural shocks widen our confidence intervals. We conclude that the estimates provide a very unreliable guide for assessing the output cost of a disinflation policy.

Keywords: disinflation, identification, vector autoregression, structural shocks

JEL Classification: E52, C32

Suggested Citation

Cecchetti, Stephen G. and Rich, Robert W., Structural Estimates of the U.S. Sacrifice Ratio (March 1999). FRB of New York Staff Report No. 71. Available at SSRN: https://ssrn.com/abstract=163192 or http://dx.doi.org/10.2139/ssrn.163192

Stephen G. Cecchetti

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
212-720-8629 (Phone)
212-720-2630 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Robert W. Rich (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216 579-2928 (Phone)

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