Pakistan Institute of Development Economics

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The Cost of Disinflation: The Sacrfice Ratio
P & R Vol.1 Issue 3
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The Cost of Disinflation: The Sacrfice Ratio

Publication Year : 2020

Price stability is imperative in economics. Independent central banks have, therefore, been encouraged by the IMF in all countries with a clear mandate to achieve a low inflation target. It is well accepted that long-run sustained growth requires a stable low inflation environment. Curbing inflationary pressures is not costless. The tradeoff between growth and inflation is well known ever since the famous Phillips curve. The recessionary impact of IMF programs, at least in their early stages, is also well known. One approach to measuring the tradeoff between growth and inflation is the Sacrifice Ratio (SR) which is defined by the ratio of accumulated loss in real GDP during a particular episode of disinflation to the overall fall in inflation during this particular episode. It is well accepted that disinflation produces output losses. The quantification of these losses due to disinflation is termed as SR. More clearly, SR is used to gauge the cost of disinflation in term of accumulated loss in real gross domestic product (GDP) due to monetary policy1.