Sacrifice Ratio, Output Loss, Inflation, Time-varying ARDL, Gibbs Sampling, Nigeria
Monetary policy in the last few decades had focused on creating the enabling conditions for sustainable economic growth, using the level of inflation as the pivotal tool, complemented with central banks’ independence and monetary policy transparency. However, attaining the delicate balance of achieving low inflation and optimal output, with minimal tradeoffs has been a cause for concern for policy makers. Thus, the measurement of the output loss, arising from the inflation-output tradeoff, forms the fulcrum of this study. This study estimates the sacrifice ratio using a state space methodology in an aggregate supply framework to adjust for real business cycle rigidities. The results from the ARDL model analysis suggest that when average inflation was lower, the sacrifice ratio was higher. On the balance of risks, an average sacrifice ratio of 0.69 shows that the achievement of price stability will come at a cost of a high output tradeoff. In that case, the monetary authority will be relatively more aggressive with its policy mix, especially adjusting interest rate, to achieve a radical influence on non-structural factors that drive inflation.
Economic and Financial Review (EFR)