IDEAS home Printed from https://ideas.repec.org/p/irn/wpaper/17-09.html
   My bibliography  Save this paper

Is Deflation Costly After All? The Perils of Erroneous Historical Classifications

Author

Listed:
  • Daniel Kaufmann

Abstract

Measurement error in historical data distorts descriptive analyses based on binary classifications. Modern replications of deficiencies in retrospective CPI estimates for the 19th century show that measurement issues cause misclassification of inflationary and deflationary episodes. We therefore underestimate the shortfall in real activity during deflation. Using various approaches to control for measurement error in 19th century US CPI data, a series of stylized facts emerge: (i) Real activity was on average substantially lower during deflations; (ii) CPI deflations were associated with at least as severe shortfalls in real activity as equity price declines and banking crises; (iii) Only severe deflations were associated with declines in real activity; (iv) Transitory and persistent deflations, as well as, monetary and nonmonetary deflations were equally associated with lower GDP growth.

Suggested Citation

  • Daniel Kaufmann, 2017. "Is Deflation Costly After All? The Perils of Erroneous Historical Classifications," IRENE Working Papers 17-09, IRENE Institute of Economic Research.
  • Handle: RePEc:irn:wpaper:17-09
    as

    Download full text from publisher

    File URL: https://www5.unine.ch/RePEc/ftp/irn/pdfs/WP17-09.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert J. Gordon, 2016. "The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War," Economics Books, Princeton University Press, edition 1, number 10544.
    2. Philippe Aghion & Antonin Bergeaud & Timo Boppart & Peter J. Klenow & Huiyu Li, 2019. "Missing Growth from Creative Destruction," American Economic Review, American Economic Association, vol. 109(8), pages 2795-2822, August.
    3. Andrew Atkeson & Patrick J. Kehoe, 2004. "Deflation and Depression: Is There an Empirical Link?," American Economic Review, American Economic Association, vol. 94(2), pages 99-103, May.
    4. Aigner, Dennis J., 1973. "Regression with a binary independent variable subject to errors of observation," Journal of Econometrics, Elsevier, vol. 1(1), pages 49-59, March.
    5. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2017. "Macrofinancial History and the New Business Cycle Facts," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 213-263.
    6. Joseph H. Davis & Christopher Hanes & Paul W. Rhode, 2009. "Harvests and Business Cycles in Nineteenth-Century America," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1675-1727.
    7. repec:fth:prinin:419 is not listed on IDEAS
    8. Robert A. Margo, 2000. "Wages and Labor Markets in the United States, 1820-1860," NBER Books, National Bureau of Economic Research, Inc, number marg00-1, Juni.
    9. Jerry Hausman, 2001. "Mismeasured Variables in Econometric Analysis: Problems from the Right and Problems from the Left," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 57-67, Fall.
    10. Peter Bernholz, 2003. "Monetary Regimes and Inflation," Books, Edward Elgar Publishing, number 2873.
    11. Brent Kreider, 2010. "Regression Coefficient Identification Decay in The Presence of Infrequent Classification Errors," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 1017-1023, November.
    12. Solomon Fabricant, 1940. "Director's Note to "The Output of Manufacturing Industries, 1899-1937"," NBER Chapters, in: The Output of Manufacturing Industries, 1899-1937, pages -17, National Bureau of Economic Research, Inc.
    13. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    14. Haroon Mumtaz & Gabor Pinter & Konstantinos Theodoridis, 2018. "What Do Vars Tell Us About The Impact Of A Credit Supply Shock?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 625-646, May.
    15. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
    16. anonymous, 1961. "Small business financing: corporate manufacturers," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 8-22.
    17. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    18. Romer, Christina, 1986. "Spurious Volatility in Historical Unemployment Data," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 1-37, February.
    19. Clarence D. Long, 1960. "Introduction to "Wages and Earnings in the United States, 1860-1890"," NBER Chapters, in: Wages and Earnings in the United States, 1860-1890, pages 1-12, National Bureau of Economic Research, Inc.
    20. Thomas J. Kane & Cecilia Elena Rouse & Douglas Staiger, 1999. "Estimating Returns to Schooling When Schooling is Misreported," NBER Working Papers 7235, National Bureau of Economic Research, Inc.
    21. Albert Rees & Donald P. Jacobs, 1961. "Real Wages in Manufacturing, 1890-1914," NBER Books, National Bureau of Economic Research, Inc, number rees61-1, Juni.
    22. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 1005-1060.
    23. Andrew J. Jalil, 2015. "A New History of Banking Panics in the United States, 1825-1929: Construction and Implications," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 295-330, July.
    24. 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.
    25. Cosslett, Stephen R. & Lee, Lung-Fei, 1985. "Serial correlation in latent discrete variable models," Journal of Econometrics, Elsevier, vol. 27(1), pages 79-97, January.
    26. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, Juni.
    27. Clarence D. Long, 1960. "Wages and Earnings in the United States, 1860-1890," NBER Books, National Bureau of Economic Research, Inc, number long60-1, Juni.
    28. Robert A. Margo, 2000. "Introduction to "Wages and Labor Markets in the United States, 1820-1860"," NBER Chapters, in: Wages and Labor Markets in the United States, 1820-1860, pages 1-5, National Bureau of Economic Research, Inc.
    29. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-334, June.
    30. Pakes, Ariel, 1982. "On the Asymptotic Bias of Wald-Type Estimators of a Straight Line When Both Variables Are Subject to Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 491-497, June.
    31. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 799-844, October.
    32. Allen, Steven G, 1992. "Changes in the Cyclical Sensitivity of Wages in the United States, 1891-1987," American Economic Review, American Economic Association, vol. 82(1), pages 122-140, March.
    33. Daniel Kaufmann, 2019. "Nominal stability over two centuries," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-23, December.
    34. AIGNER, Dennis J., 1973. "Regression with a binary independent variable subject to errors of observation," CORE Discussion Papers RP 130, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    35. Austan D. Goolsbee & Peter J. Klenow, 2018. "Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 488-492, May.
    36. Card, David, 1996. "The Effect of Unions on the Structure of Wages: A Longitudinal Analysis," Econometrica, Econometric Society, vol. 64(4), pages 957-979, July.
    37. Solomon Fabricant, 1940. "The Output of Manufacturing Industries, 1899-1937," NBER Books, National Bureau of Economic Research, Inc, number fabr40-1, Juni.
    38. Aprajit Mahajan, 2006. "Identification and Estimation of Regression Models with Misclassification," Econometrica, Econometric Society, vol. 74(3), pages 631-665, May.
    39. Beckworth, David, 2007. "The postbellum deflation and its lessons for today," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 195-214, August.
    40. Thomas J. Kane & Cecilia Rouse & Douglas Staiger, 1999. "Estimating Returns to Schooling When Schooling is Misreported," Working Papers 798, Princeton University, Department of Economics, Industrial Relations Section..
    41. Solomon Fabricant, 1940. "Index to "The Output of Manufacturing Industries, 1899-1937"," NBER Chapters, in: The Output of Manufacturing Industries, 1899-1937, pages 663-685, National Bureau of Economic Research, Inc.
    42. Claudio Borio & Magdalena Erdem & Andrew Filardo & Boris Hofmann, 2015. "The costs of deflations: a historical perspective," BIS Quarterly Review, Bank for International Settlements, March.
    43. Joseph H. Davis, 2004. "An Annual Index of U. S. Industrial Production, 1790–1915," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1177-1215.
    44. Solomon Fabricant, 1940. "Preface to "The Output of Manufacturing Industries, 1899-1937"," NBER Chapters, in: The Output of Manufacturing Industries, 1899-1937, pages -15--12, National Bureau of Economic Research, Inc.
    45. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    46. Daniel Kaufmann, 2016. "Is Deflation Costly After All? Evidence from Noisy Historical Data," KOF Working papers 16-421, KOF Swiss Economic Institute, ETH Zurich.
    47. Hoover, Ethel D., 1958. "Wholesale and Retail Prices in the Nineteenth Century," The Journal of Economic History, Cambridge University Press, vol. 18(3), pages 298-316, September.
    48. Austan D. Goolsbee & Peter J. Klenow, 2018. "Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce," NBER Working Papers 24649, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Kaufmann, 2019. "Nominal stability over two centuries," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-23, December.

    More about this item

    Keywords

    Deflation; real activity; monetary history; measurement error; binary regressors; misclassification bias; bounds; GMM;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:irn:wpaper:17-09. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sylvain Weber). General contact details of provider: http://edirc.repec.org/data/irenech.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.