In his seminal paper Ball (1994) devised a methodology to measure the output cost associated with disinflations (the sacrifice ratio) and was able to test several hypotheses concerning its determinants for a cross section of moderate inflation OECD economies. The sacrifice ratio measure is the sum of the differences between the logs of trend and actual output divided by a change in trend inflation during a given disinflation episode. It is interpreted as the output loss (or cost) of reducing inflation by one point. Ball(1994) explains that his measure best fits instances where the fall in trend inflation is the result of explicit contractionary aggregate demand policies and argues that his algorithm for identifying dis-inflationary episodes best captures these policy shifts.
In his seminal paper Ball (1994) devised a methodology to measure the output cost associated with disinflations (the sacrifice ratio) and was able to test several hypotheses concerning its determinants for a cross section of moderate inflation OECD economies. The sacrifice ratio measure is the sum of the differences between the logs of trend and actual output divided by a change in trend inflation during a given disinflation episode. It is interpreted as the output loss (or cost) of reducing inflation by one point. Ball (1994) explains that his measure best fits instances where the fall in trend inflation is the result of explicit contractionaryaggregate demand policies and argues that his algorithm for identifying dis-inflationary episodes best captures these policy shifts.
The role of openness to trade in affecting the slope of the inflation – output tradeoff has been re-investigated in several recent papers. Temple (2002) measures openness by imports as a percentage of GDP and finds no relationship between it and the sacrifice ratio using Ball’s annual dataset. Since an inverse relationship is predicted by many influential open economy models (i.e. Romer (1993)), Temple argues that his results cast doubt on the Barro-ordon (1983) Time-Consistency framework’s ability to explain cross national variations in inflation rates. This is due to the fact that they rely on the existence of an inverse relationship between openness and the sacrifice ratio to argue that Central banks in more open economies would have a lower equilibrium inflation rate when facing a steeper Phillips curve.
