Structural estimates of the South African sacrifice ratio

AbstractThis paper estimates the output cost of fighting inflation—the sacrifice ratio—for the South African economy using quarterly data spanning the period 1998:1–2019:3. To compute the sacrifice ratio, the structural vector autoregressive (SVAR) model developed by Cecchetti and Rich (Citation2001) based on Cecchetti (Citation1994) is employed. Our findings show us a small sacrifice ratio, which lies within the range 0.00002–0.231 percent with an average of 0.031 percent, indicating a low level of output to be sacrificed while fighting inflation. Hence, the reserve bank is recommended to sustain an inflation rate within the target range and reap the benefits of a predictable and stable price path, as restrictive monetary policy has only a transitory effect on real variables like output.Keywords: inflation targetingoutputsacrifice ratioSouth Africastructural VAR modelJEL CLASSIFICATION: E32E52 Additional informationFundingUnited Nations Uiversity World Institute for Development Economics Research.