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Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues

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  • Willem H. Buiter
  • Marcus H. Miller

Abstract

This paper analyses how the output or unemployment cost of achieving a sustainable reduction in the rate of inflation depends on the structure of the wage-price process and how the "sacrifice ratio" can be minimized. In models where the natural rate is invariant under the anti-inflationary policies, price level inertia is not sufficient for a positive sacrifice ratio. Without sluggishness in the core inflation rate, a zero sacrifice ratio can be achieved simply through intelligent demand management. With sluggish core inflation, the sacrifice ratio is positive unless intelligent demand management is complemented by cost-reducing fiscal measures o reffective incomes policy. Letting the exchange rate float does not reduce the sacrifice ratio. If core inflation is partly backward-looking and partly forward-looking, current core inflation may be a function of current and past expectations of future recessions. Conventional sacrifice ratio calculations ignore forward-looking aspects of behaviour and may therefore underestimate the true cost of disinflation. If there is hysteresis in the natural rate (e.g. through a gradual adjustment of the natural rate towards the actual rate) and if there is sluggish core inflation, the sacrifice ratio will become infinite.Whenever sluggish core inflation is present, credibility of the anti-inflationary (monetary) policy alone cannot obviate a positive sacrifice ratio.

Suggested Citation

  • Willem H. Buiter & Marcus H. Miller, 1983. "Costs and Benefits of an Anti-Inflationary Policy: Questions and Issues," NBER Working Papers 1252, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1252
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    Cited by:

    1. Robert Amano & Donald Coletti & Tiff Macklem, 1998. "Monetary rules when economic behaviour changes," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Robert G. King & Alexander L. Wolman, 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574.
    3. Willem H. Buiter, 1984. "Policy evaluation and design for continuous time linear rational expectations models: some recent development," NBER Technical Working Papers 0034, National Bureau of Economic Research, Inc.
    4. Willem H. Buiter, 1987. "The Right Combination of Demand and Supply Policies: The Case for a Two-Handed Approach," NBER Working Papers 2333, National Bureau of Economic Research, Inc.
    5. Willem H. Buiter, 1988. "Macroeconomic Policy Design in an Interdependent World Economy: An Analysis of Three Contingencies," NBER Chapters, in: International Aspects of Fiscal Policies, pages 121-172, National Bureau of Economic Research, Inc.
    6. Caruso-Bloeck, Martin & Mello, Miguel & Ponce, Jorge, 2023. "News of disinflation and firms’ expectations: New causal evidence," Journal of International Money and Finance, Elsevier, vol. 137(C).
    7. Richard Black & David Rose, 1997. "Canadian Policy Analysis Model: CPAM," Staff Working Papers 97-16, Bank of Canada.
    8. Buiter, Willem H., 2006. "The elusive welfare economics of price stability as a monetary policy objective: why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank.
    9. Özge Senay, "undated". "Disinflation Dynamics in an Open Economy General Equilibrium Model," Discussion Papers 98/15, Department of Economics, University of York.
    10. Buiter, Willem, 2007. "Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and," CEPR Discussion Papers 6099, C.E.P.R. Discussion Papers.
    11. Willem H. Buiter, 2007. "Is Numerairology the Future of Monetary Economics? Unbundling numeraire and medium of exchange through a virtual currency and a shadow exchange rate," NBER Working Papers 12839, National Bureau of Economic Research, Inc.
    12. Volker Wieland, "undated". "Monetary Policy and Uncertainty about the Natural Unemployment Rate," Computing in Economics and Finance 1997 11, Society for Computational Economics.
    13. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1997. "State-dependent pricing and the dynamics of business cycles," Working Paper 97-02, Federal Reserve Bank of Richmond.
    14. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
    15. Willem H. Buiter, 2004. "The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?," NBER Working Papers 10848, National Bureau of Economic Research, Inc.
    16. Buiter, Willem, 2006. "How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and C," CEPR Discussion Papers 5772, C.E.P.R. Discussion Papers.

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