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A Benefit Cost Analysis of Disinflation
By Christopher J. Neely and Christopher J. Waller**

This article presents a benefit-cost analysis of disinflation as well as critiques of twocommon methods for computing those statistics. The costs of disinflation are measured through"sacrifice ratios" (Ball (1994)), the quantity of output lost for each percentage-point reductionin the inflation rate. The benefits of disinflation are calculated by Robert Barro (1995), whoestimates the growth benefits from lower inflation. Ball's estimates are theoreticallyobjectionable and shown to be very fragile to minor changes in technique, but worthy of studybecause of the interest they have elicited. Despite the uncertainty associated with Ball'ssacrifice ratio estimates and Barro's growth estimates, relating them does permit us to obtain arough measure of the net cost of disinflation. Our findings indicate that, contrary to popularopinion, disinflation probably produces a net benefit, not a net cost and the output lossesassociated with a typical U.S. disinflation are likely made up in 10-20 years -- less than onegeneration.

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