Hussain (2005) investigated and revealed belt of inflation comprised between 4-6 percent level using 1973 to 2005 time series data and claimed that before and after this belt there would be deterioration of economic growth a high sacrifice ratio
, further many studies have been done on this issue resulting the low and high sacrifice ration between economic growth and inflation see Khan (2007) Abdullah and Kalim.
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
. Section VIII concludes.
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
Given the invariance of the sacrifice ratio
, the number of required man-years of excess unemployment is hardwired.
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 (0.13 for Canada versus 0.03 for the United States).
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
. Durand (2002) derives the NAIRU Grande region from the Kuttner UC approach and--unlike Adam and Guarda--includes the mark-up of prices over unit labour costs in the set of supply shock variables.
One can readily use this stylized model to obtain an analytical expression for the sacrifice ratio
. Suppose, after the cold-turkey cessation in the growth of money, there are no further expected or actual changes in the money supply.
We thus resort to a value drawn from a calibrated model, FPS, which has embedded a sacrifice ratio
For each of these episodes Ball has computed a sacrifice ratio
- total point-years of unemployment above that at episode start, divided by total points of inflation lost - which is used as the dependent variable in these regressions.(15)