No Pain, No Gain? The Simple Analytics of Efficient Disinflation in Open Economies

Willem Buiter and Clemens Grafe

No 3038, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The Paper studies the design of efficient disinflation programmes in open economies using the sacrifice ratio; that is, the cumulative additional un-employment or cumulative lost output required to achieve a 1% sustained reduction in the rate of inflation, as the metric of efficiency. The ?new Keynesian? Phillips curve first proposed by Calvo has a zero sacrifice ratio: costless disinflation is possible, because the inflation process is purely forward-looking. There is inertia or rigidity in the price level but not in the rate of inflation. More interesting inflation kernels for which current inflation is partly forward-looking and partly backward-looking have a positive sacrifice ratio. Real exchange rate appreciation early in the disinflation process may raise the sacrifice ratio relative to a policy that keeps the real exchange rate constant. The sacrifice ratio is lower under gradualism than under ?cold turkey?. Effficient disinflation policies may, however, be time-inconsistent and therefore not credible.

Keywords: Sacrifice ratio; Disinflation; New keynesian phillips curve (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
Date: 2001-11
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Citations: View citations in EconPapers (11)

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