Working Paper Series no. 163: Structural Assessment of the Sacrifice Ratio and the Euro Area (in French)

Abstract

In this paper, we seek to estimate the sacrifice ratio of the euro area using a small DSGE model where prices and wages are sticky. We estimate model's parameters so as to minimize the distance between VAR-based and model-based covariances of a set of variables. The estimated value of the sacrifice ratio reaches 1.30%. In a second step, we proceed to a set of counterfactual exercises in order to highlight the link between the sacrifice ratio and the degree of prices and wages stickiness. We obtain that a decrease of prices stickiness does not necessary result in a decrease of the sacrifice ratio. In addition, the sacrifice ratio rises with the degree of wage stickiness.

Jérôme Coffinet, Julien Matheron and Céline Poilly
January 2007

Classification JEL : E31, C51

Keywords : sacrifice ratio, sticky prices and sticky wages, DSGE model