Sacrifice Ratios and Inflation Targeting: The Role of Credibility

Nicolás de Roux and Marc Hofstetter

International Finance, 2014, vol. 17, issue 3, 381-401

Abstract: type="main" xml:lang="en">

Proponents of inflation targeting (IT) claim that it increases the credibility of central banks, which in turn should result in smaller sacrifice ratios (SRs) – that is, the ratio of output losses to the change in trend inflation during disinflations. We show that IT does indeed reduce SRs, but only if the disinflation is long: in a four-year-long disinflation, our estimates suggest that IT reduces SRs by at least 60%. In fast disinflations, IT does not affect SRs. These results suggest that IT and fast disinflations are substitute alternatives in enhancing the credibility of disinflationary processes and reducing their costs.

Date: 2014
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Working Paper: Sacrifice Ratios and Inflation Targeting: The Role of Credibility (2012)
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