Sacrifice Ratios and Inflation Targeting: The Role of Credibility

24 Pages Posted: 21 Feb 2012 Last revised: 24 Feb 2012

See all articles by Nicolás de Roux

Nicolás de Roux

Universidad de los Andes - Department of Economics

Marc Hofstetter

Universidad de los Andes

Date Written: February 2, 2012

Abstract

Two recent papers (Gonçalves and Carvalho, 2009; and Brito, 2010) hold contradictory views regarding the role of inflation targeting during periods of disinflation. The first paper claims that inflation targeting reduces sacrifice ratios — i.e., the ratio of output losses to the change in trend inflation — during disinflations; the second paper refutes this result. We show here that inflation targeting only matters if disinflations are slow. The credibility gains of a fast disinflation make inflation targeting irrelevant for reducing the output-inflation trade-off.

Keywords: Inflation Targeting, Disinflation, Monetary Policy, Sacrifice Ratios, Credibility

JEL Classification: E31, E32, E52, E58

Suggested Citation

de Roux, Nicolás and Hofstetter, Marc, Sacrifice Ratios and Inflation Targeting: The Role of Credibility (February 2, 2012). Documento CEDE No. 2012-03, Available at SSRN: https://ssrn.com/abstract=2008412 or http://dx.doi.org/10.2139/ssrn.2008412

Nicolás De Roux (Contact Author)

Universidad de los Andes - Department of Economics ( email )

Carrera 1a No. 18A-10
Bogota, AA4976
Colombia

Marc Hofstetter

Universidad de los Andes ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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