Keywords: Monetary policy, sacrifice ratios
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.
Full paper (170 KB PDF)
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Last update: November 30, 2001