Given the estimated sp[kappa]d of learning, we compute the macroeconomic effects of a 100 bp disinflation focusing on the sacrifice ratio
and the monetary policy effort.
Section V tests the robustness of the results under the assumptions that loans are denominated in foreign currency, Section VI reports results for a shocks to the uncovered interest rate parity, and Section VII report results for the sacrifice ratios
Traditional studies of the sacrifice ratio
proceeded by estimating a Phillips curve (Okun, 1978; Gordon, 1982).
Low-inflation countries will have a relatively flat Phillips curve and a large sacrifice ratio
, while high-inflation countries will have a steep Phillips curve and a small sacrifice ratio
Therefore, both weaker inflation persistence and a flatter slope imply a larger sacrifice ratio
, which is especially troublesome for monetary policymakers.
The resulting inflation persistence and high sacrifice ratio
, even though artifacts of monetary policy, make the FOMC reluctant to announce an explicit inflation target.
This result has particular significance since it establishes that the model predicts a sacrifice ratio
which is decreasing with the degree of nominal wage indexation.
For example, the difference between the sacrifice ratios
for Canada and the United States is a result of a larger weight on lagged CPI inflation in the Canadian price block (0.
Among the 15 countries for which significant coefficients for both lagged inflation and the NAIRU gap [NAIRU resulting from Hodrick-Prescott (100) filter] are obtained, the estimated NAIRU gap parameter based on the unemployment rate Grande region is the fifth-biggest (after Austria, Denmark, Greece, and Switzerland), implying comparatively low sacrifice ratios
The sacrifice ratio
(SR) is the ratio of the total output loss to the reduction of inflation g.
If the total costs of going from 2 percent to zero inflation is 4 percent of GDP, as implied by a sacrifice ratio
of 2, the break-even point turns out to be B* = C(d - g) = 0.
25 point-years of unemployment to the sacrifice ratio
of an average disinflation.