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29.3 Reducing Inflation - Coggle Diagram
29.3 Reducing Inflation
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The Cost of Disinflation
cost of disfinlation → loss of output that is generated in the process; short term pain (temporary loss in economic activity and ↓U) for long-term gain (↑costs to individuals and firms associated with lower i-rates
sacrifice ratio → the cumulative loss in real GDP caused by disinflation (expressed as a % of potential output), ÷ by # %-point by which inflation has fallen; typical estimates for many developed countries range b/w 2 and 4
*the sacrifice ratio is larger the deeper the recession and the longer it takes real GDP to return to potential
Conclusion
- adopting inflation-targeting regimes = successfulness at keeping inflation low and stable
- sustained inflation is ultimately caused by monetary policy → unless central banks remain committed to keeping inflation low and stable, damaging inflation could return as a potential threat to the economy