ABSTRACT
In this chapter we address an important question: what are the output costs (the so-called sacrifice ratio) of a deceleration in the money growth rate under flexible exchange rates? More particularly, we are interested in the factors underlying these output costs, i.e. what determines whether these will be large or small. Identifying these factors also allows us to explain why the sacrifice ratio, defined as the ratio of the percentage of GNP lost to the reduction in the inflation rate, is different across different countries. Later in the chapter we also look at the output costs of disin-flating by pegging to a low-inflation country.
