Sacrifice Ratio and Price Level: Analysis on Data from Selected Countries of the European Union

The work examines the relationship between the sacrifice ratio (SR) and the price level in eight countries of the European Union, expressed through the harmonized index of consumer prices (HICP). The goal was to test the hypothesis whether countries with a higher price level achieve higher SR values than countries with a lower price level. The original plan to test the hypothesis through a VAR model was ultimately abandoned due to complexity and poor quality of it, and panel regression was used instead. Overall, two models are tested, which differ in that for each one different data of the values of the dependent variable SR were used, which were calculated in a different way, one through the GDP deflator and the second one through the inflation rate as annual changes in the Consumer Price Index (CPI). After the output of the models, due to high multicollinearity, the proposed model had to be adjusted by centering the selected variables. In general, for both model types, the results were more satisfactory when SR values calculated with the GDP deflator were used. The outputs of the modified model have already provided conclusive results that allowed the research hypothesis to be rejected.