The experience of the Volcker disinflation of the early 1980s

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The experience of the Volcker disinflation of the early 1980s generally decreased estimates of the sacrifice ratio. The sacrifice ratio is the amount of GDP that must be forgone to reduce inflation by 1%. The Volcker disinflation involved high interest rates and reduced government spending which caused short-term economic pain but led to lower inflation in the long run. This experience showed that the sacrifice ratio was not as high as previously estimated, leading to a reassessment of macroeconomic policy.

The Experience of the Volcker Disinflation of the Early 1980s