ABSTRACT
This chapter describes the contracting approach to the problem of disinflation and discusses criticisms of the approach and characteristics of contracts that affect the possible speed of disinflation. Further, author calculates the sacrifice ratio-the percentage points of GNP lost per 1 per cent reduction in the inflation rate-for alternative policies and parameter values. Furthermore, the chapter examines the problem of the credibility of policy intentions, and the effects of a lack of belief that a policy will be maintained; it also describes alternative policies for disinflation and compares the costs of disinflation in the United States from 1979 to 1986 with predictions of those costs. The depth of the recession, and the high real interest rates that made bankruptcies more likely, both probably contributed them to greater flexibility of wages than would be predicted by a simple contract model.
