INFLATION HISTORY AND THE SACRIFICE RATIO: EPISODE‐SPECIFIC EVIDENCE

Takashi Senda and Julie Smith

Contemporary Economic Policy, 2008, vol. 26, issue 3, 409-419

Abstract: This article examines whether episode‐specific analysis can show a negative relationship between inflation and the slope of the Phillips curve that has been found in cross‐country analysis. While the relationship between inflation and the Phillips curve slope is widely accepted from cross‐country analysis, it has remained unproven in previous episode‐specific studies. By defining inflation history as a weighted average of past inflation, this study finds a negative effect of inflation history on the sacrifice ratio, which is what is expected from the cross‐country analysis. The negative relationship does not disappear even after including other conventional determinants of the sacrifice ratio. (JEL E52, E31)

Date: 2008
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