Book contents
- Frontmatter
- Contents
- Foreword by Robert M. Solow
- Preface
- Introduction
- PART ONE THE HISTORY, THEORY, AND MEASUREMENT OF PRODUCTIVITY GROWTH
- PART TWO INTERPRETING PRODUCTIVITY FLUCTUATIONS OVER THE BUSINESS CYCLE
- PART THREE THE THEORY OF THE INFLATION-UNEMPLOYMENT TRADEOFF
- PART FOUR EMPIRICAL STUDIES OF INFLATION DYNAMICS IN THE UNITED STATES
- Part Four Introduction
- 14 Can the Inflation of the 1970s be Explained?
- 15 The Output Cost of Disinflation in Traditional and Vector Autoregressive Models
- 16 German and American Wage and Price Dynamics: Differences and Common Themes
- 17 Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU
- Subject Index
- Author Index
15 - The Output Cost of Disinflation in Traditional and Vector Autoregressive Models
Published online by Cambridge University Press: 10 December 2009
- Frontmatter
- Contents
- Foreword by Robert M. Solow
- Preface
- Introduction
- PART ONE THE HISTORY, THEORY, AND MEASUREMENT OF PRODUCTIVITY GROWTH
- PART TWO INTERPRETING PRODUCTIVITY FLUCTUATIONS OVER THE BUSINESS CYCLE
- PART THREE THE THEORY OF THE INFLATION-UNEMPLOYMENT TRADEOFF
- PART FOUR EMPIRICAL STUDIES OF INFLATION DYNAMICS IN THE UNITED STATES
- Part Four Introduction
- 14 Can the Inflation of the 1970s be Explained?
- 15 The Output Cost of Disinflation in Traditional and Vector Autoregressive Models
- 16 German and American Wage and Price Dynamics: Differences and Common Themes
- 17 Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU
- Subject Index
- Author Index
Summary
The speed of adjustment of the aggregate price level to demand and supply shocks has long been a leading topic of controversy in macroeconomics. Among the many issues requiring for their resolution solid empirical evidence on the dynamics of price adjustment is the prediction of the output loss that would accompany a strategy of monetary disinflation. In 1978 Arthur M. Okun surveyed a variety of econometric evidence and reached the pessimistic conclusion that the inflation process in the postwar United States is so inertia prone that the cumulative sacrifice of 10 percent of a year's GNP would be required to achieve a permanent 1 percentage point reduction in the inflation rate.
This paper compares the dynamic response patterns of prices and output that emerge from two quite different approaches to time-series econometrics, the traditional structural framework imbedded in most econometric models, and the more recent nonstructural or atheoretical vector autoregressive (VAR) technique. Both approaches reach conclusions by imposing restrictions of different types; by assessing the validity of these restrictions, we are able to compare the merits of each methodology. Of equal importance are new estimates of the speed of price adjustment in the postwar United States, which we summarize in a single number called the sacrifice ratio that measures the output loss required to eliminate permanently one point of inflation. By introducing several channels of monetary influence on the inflation process that are often overlooked, we conclude that the sacrifice ratio is roughly half that suggested by Okun's survey.
- Type
- Chapter
- Information
- Productivity Growth, Inflation, and UnemploymentThe Collected Essays of Robert J. Gordon, pp. 389 - 419Publisher: Cambridge University PressPrint publication year: 2003