Sacrifice Ratios and Monetary Policy Credibility: Do Smaller Budget Deficits, Inflation-Indexed Debt, and Inflation Targets Lower Disinflation Costs?

62 Pages Posted: 14 Dec 2001

Date Written: November 2001

Abstract

A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect measure of the tradeoff between inflation and aggregate output. This study endeavors to advance previous studies in three ways. First, the literature does not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility. These include the stock (and flow) of government debt, the issuance of inflation-indexed bonds, and the existence of explicit inflation targets. Second, previous studies unfortunately exclude non-OECD countries. Third, the literature is divided with respect to research design, and therefore this study produces sensitivity analyses of previous results. Given these addenda, the results generally suggest that credibility proxies are largely sensitive to research design. However, some data do support the hypothesis that governments with an incentive, rather than perhaps a publicized objective, to lower inflation achieve lower sacrifice ratios.

Keywords: Monetary policy, sacrifice ratios

JEL Classification: E31, E32, E52

Suggested Citation

Durham, J. Benson, Sacrifice Ratios and Monetary Policy Credibility: Do Smaller Budget Deficits, Inflation-Indexed Debt, and Inflation Targets Lower Disinflation Costs? (November 2001). FEDS Working Paper No. 2001-47. Available at SSRN: https://ssrn.com/abstract=293681 or http://dx.doi.org/10.2139/ssrn.293681

J. Benson Durham (Contact Author)

affiliation not provided to SSRN

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