WORKING PAPER 01/2023

Trend inflation for the year is then the eight-quarter moving average centered at the year, i.e., an average over the four quarters of the year as well as the two previous and the two following quarters. [...] Essentially, the sacrifice ratio is the sum of the deviations between the regression of the trend growth of output and the actual output, divided by the change in the inflation rate in the same period. [...] Theoretically, the 25bp rate hike in 2018 led to a (plausible) sacrifice ratio of 0.24, yet it seems questionable to what extent the 25bp rate hike is the only cause of the 501bp reduction in the 2018 to 2021 period. [...] As Cecchetti and Rich (2001) emphasise, however, “the high degree of imprecision associated with the estimates suggests that our knowledge about the actual impact of monetary policy on the behaviour of the economy is quite limited.” Clearly, notwithstanding these results, the causality of the relationship between contractive monetary policies, periods of disinflation and stalling economic growth a. [...] The true sacrifice ratio may be overestimated in the case where the impact of a real shock on the economy is ignored or the true costs of a disinflationary monetary policy may be underestimated.