Note 1-12

12 Estimation of the correlation between the GDP gap and consumer prices (the sacrifice ratio) shows that the GDP gap must be reduced by about 4 percentage points in order to achieve a 1% increase in consumer prices. Also, an estimation on Japan by the OECD (2001) indicates that the output gap must be changed by about 1.6 percentage points in order to change the inflation rate by 1 percentage point, but when the relationship is estimated only for a period when the rate of inflation is below 1%, the supply output gap must be changed by 6.3 percentage points in order to change the inflation rate by 1 percentage point. The correlation between the GDP gap and consumer prices (the sacrifice ratio) presumes that the actual inflation rate matches the expected inflation rate, and is calculated using (1 - )/, in which is the coefficient on the expected inflation rate and is the coefficient on the GDP gap in the Philips curve equation.