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

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  • 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.

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  • 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
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    2. Dezhbakhsh, Hashem & Levy, Daniel, 2022. "Interpolation and shock persistence of prewar U.S. macroeconomic time series: A reconsideration," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics.
    3. Niko Hauzenberger & Daniel Kaufmann & Rebecca Stuart & Cédric Tille, 2022. "What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020," IRENE Working Papers 22-03, IRENE Institute of Economic Research.
    4. Rebecca Stuart, 2022. "Stock Return Predictability before the First World War," IRENE Working Papers 22-02, IRENE Institute of Economic Research.
    5. 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.
    6. Stefan Gerlach & Rebecca Stuart, 2021. "Commodity Prices and Global Inflation, 1851-1913," IRENE Working Papers 21-07, IRENE Institute of Economic Research.

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    More about this item

    Keywords

    Deflation; real activity; monetary history; measurement error; binary regressors; misclassification bias; bounds; GMM;
    All these keywords.

    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

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