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The sacrifice ratio and active fiscal policy

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  • Christopher G. Gibbs
  • Herbert W. Xin

Abstract

We compare the sacrifice ratio for a disinflation under an active monetary and passive fiscal policy mix to the sacrifice ratio under passive monetary and active fiscal policy, holding all else equal. The sacrifice ratio may be higher or lower in the active fiscal policy regime depending on the fiscal rule and the design of the disinflation policy. Fiscal led disinflations may be less costly than monetary led ones when they are anticipated. However, they may generate larger sacrifice ratios than monetary led ones when implemented “cold turkey.” Overall, the variance of the sacrifice ratio under fiscal led policies is much higher than that under monetary led policies.

Suggested Citation

  • Christopher G. Gibbs & Herbert W. Xin, 2024. "The sacrifice ratio and active fiscal policy," Working Papers 2024-12, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2024-12
    as

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    References listed on IDEAS

    as
    1. Mariano Kulish & Adrian Pagan, 2017. "Estimation and Solution of Models with Expectations and Structural Changes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 255-274, March.
    2. Gibbs, Christopher G. & Kulish, Mariano, 2017. "Disinflations in a model of imperfectly anchored expectations," European Economic Review, Elsevier, vol. 100(C), pages 157-174.
    3. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-289, March.
    4. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sacrifice ratio; monetary policy; fiscal policy; inflation; disinflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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