How Large is the Output Cost of Disinflation?

Robert Tetlow

No 2022-079, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines estimates of, and drivers for, the sacrifice ratio in the United States. Three approaches are employed. The first reviews the literature on what sacrifice ratio might be expected. The second studies a generic disinflation experiment using 40 estimated macro models of the U.S. economy, calculating a distribution of sacrifice ratios. Those sacrifice ratios are high by historical standards and the paper discusses some stories for why this is so. The role of expectations formation and the credibility of policy is emphasized. The third approach gets under the hood of drivers of the output cost of disinflation by carrying out a selection of disinflation experiments using the FRB/US model, varying certain characteristics of the model’s expectations formation mechanism. Pinning down a precise measure for the output cost of disinflation is challenging. But the literature and policy experiments do offer some guidance on how the sacrifice ratio can be reduced.

Keywords: Monetary policy; Disinflation; Sacrifice ratio; Expectations formation (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2022-11-23
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-79

DOI: 10.17016/FEDS.2022.079

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