Abstract

We estimate the output loss associated with deliberate disinflation – the sacrifice ratio – for six small open economies, through the simulation of estimated VAR models where the historical monetary policy has been identified. Compared to estimates of other studies, our estimated sacrifice ratios are quite low for Norway and Sweden, quite high for Canada and the Netherlands, and relatively precisely estimated. A low sacrifice ratio implies, ceteris paribus, that inflation can be stabilized within narrower bands for a given variability of output. Varying sacrifice ratios across inflation-targeting countries may suggest that the inflation-rate bandwidth should also vary.

Citations