ABSTRACT
Since the 1990s, economic policy-makers have become increasingly concerned with inflation stabilization. This is reflected for instance by the introduction of explicit inflation targets for monetary policy in many industrialized countries. The increased focus on inflation stabilization by policy makers has contributed towards bringing inflation rates down from the high rates experienced in many countries in the 1970s and 1980s. However, disinflation policies and contractive monetary policy stances have often been associated with more or less persistent output reduction. The disinflation that remains to be achieved is decreasing in credibility, and increasing in the central bank's weight on output gap stabilization and nominal rigidity. The vector autoregressive (VAR) models introduced by Sims have been used extensively to analyze the structure of the monetary transmission mechanism. The sacrifice ratio appears to have declined for the inflation-targeting countries. This result is robust to the operationalization of aggregate economic activity as either the output gap or real output growth in the VAR models.
