Macroeconomic Theory Jeffrey Parker, Reed College Paper of the week
Assigned paper
Ball, Laurence. What Determines the Sacrifice Ratio? In Monetary Policy, ed. by N. Gregory Mankiw. Chicago and London: University of Chicago Press. (Book is on reserve; you may be able to find a link somewhere.)
Reading suggestions
This paper is fairly straight-forward: no fancy math or complex econometrics.
Questions for analysis
How does Ball define the sacrifice ratio, both mathematically and intuitively?
Given the modern models of aggregate supply and the Phillips curve, would a country incur any sacrifice if the decline in inflation were correctly anticipated? What does this imply about the impact of central-bank credibility on the sacrifice ratio?
Would you expect countries with more elastic short-run aggregate-supply curves to have higher or lower sacrifice ratios? Why? Given the slope of the Lucas supply curve in Romer's equation (6.84), are the countries with the highest sacrifice ratios in Ball's Table 5.3 the ones that you would expect?
Is each of the following supported by Ball's empirical results in the latter part of the paper?
Reversing large inflation is less costly than reversing small ones, per point of inflation reduction.
"Cold turkey" inflation reduction is more costly than "gradualism."
Countries with more wage flexibility incur less unemployment during disinflation.