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BPEA Article

The Output Cost of Disinflation in Traditional and Vector Autoregressive Models



THE SPEED of adjustment of the aggregate price level to demand and
supply shocks has long been a leading topic of controversy in macroeconomics.
Among the many issues requiring for their resolution solid
empirical evidence on the dynamics of price adjustment is the prediction
of the output loss that would accompany a strategy of monetary disinflation.
Four years ago Arthur M. Okun surveyed a variety of econometric
evidence and reached the pessimistic conclusion that the inflation
process in the postwar United States is so inertia prone that the
cumulative sacrifice of 10 percent of a year's GNP would be required to
achieve a permanent 1 percentage point reduction in the inflation rate.

Robert J. Gordon

Stanley G. Harris Professor of the Social Sciences - Northwestern University


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