A Benefit Cost Analysis of Disinflation
By Christopher J. Neely and Christopher J. Waller
This article presents a benefit-cost analysis of disinflation as well as critiques of two common methods for computing those statistics. The costs of disinflation are measured through "sacrifice ratios" (Ball (1994)), the quantity of output lost for each percentage-point reduction in the inflation rate. The benefits of disinflation are calculated by Robert Barro (1995), who estimates the growth benefits from lower inflation. Ball's estimates are theoretically objectionable and shown to be very fragile to minor changes in technique, but worthy of study because of the interest they have elicited. Despite the uncertainty associated with Ball's sacrifice ratio estimates and Barro's growth estimates, relating them does permit us to obtain a rough measure of the net cost of disinflation. Our findings indicate that, contrary to popular opinion, disinflation probably produces a net benefit, not a net cost and the output losses associated with a typical U.S. disinflation are likely made up in 10-20 years -- less than one generation.
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