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Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard

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  • Robert B. Barsky
  • J. Bradford De Long

Abstract

We examine interest and inflation rates from 1879 to 1913. Deflation prior to 1896 was followed by inflation. Average U. S. inflation was 3.1 percentage points higher in the years after 1896, yet nominal interest rates were no higher after 1896. This nonadjustment of nominal rates would be consistent with rational expectations if inflation was not forecastable, and indeed univariate tests show little sign of serial correlation. But gold production does forecast inflation. The relationship between mining and inflation was such that expected inflation should have risen 300 basis points between 1890 and 1910. We consider explanations of this failure to foresee the shift in inflation after 1896 and conclude that it is not persuasive evidence that investors ignored relevant information, but does suggest great uncertainty about the appropriate model for analyzing the economy.

Suggested Citation

  • Robert B. Barsky & J. Bradford De Long, 1991. "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 815-836.
    • Handle: RePEc:oup:qjecon:v:106:y:1991:i:3:p:815-836.
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    References listed on IDEAS

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    1. Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 3-24, January.
    2. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March.
    3. Daniel K. Benjamin & Levis A. Kochin, 1984. "War, Prices, and Interest Rates: A Martial Solution to Gibson's Paradox," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 587-612, National Bureau of Economic Research, Inc.
    4. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-550, June.
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