The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a Structural Vector Autoregressive (SVAR) technique following Cecchetti and Rich and, secondly, an episode-based procedure proposed by Ball based on historical disinflationary episodes. The estimation results do generally not support empirical evidence of overly high sacrifice ratios and hence, on average, indicate relatively modest costs of structural adjustments in the Euro area.
sacrifice ratio structural adjustment Euro Area VAR episode method Phillips curve