Is Deflation depressing? Evidence from the Classical Gold Standard
We distinguish between good and bad deflations. In the former case, falling prices may be caused by aggregate supply (possibly driven by technology advances) increasing more rapidly than aggregate demand. In the latter case, declines in aggregate demand outpace any expansion in aggregate supply. This was the experience in the Great Depression (1929-33), the recession of 1919-21, and may be the case in Japan today. In this paper we focus on the price level and growth experience of the United States and Canada, 1870-1913. Both countries adhered to the international gold standard. This meant that the domestic price level was largely determined by international (exogenous) forces. In addition, neither country had a central bank which could intervene in the gold market to shield the domestic economy from external conditions. We proceed by identifying separate supply' shocks, money supply shocks and demand shocks using a Blanchard-Quah methodology. We model the economy as a small open economy on the gold standard and identify the shocks by imposing long run restrictions on the impact of the shocks and on output prices. We then do a historical decomposition to examine the impact of each shock on output. The results for the U.S. are clear: the different rates of change in the price levels before and after 1890 are attributed to different monetary shocks, but these shocks explain very little of output growth or volatility, which is almost entirely a response to supply' shocks. For Canada the results are murkier. As in the U.S., the money supply shocks before 1896 are predominantly negative and after that are largely positive. However, they are non-neutral, and relative to the U.S., money supply shocks play a larger role in determining output behavior in Canada. The key conclusion of our analysis is that the simple demarcation of good vs. bad deflation, where either prices fall because of a positive supply shock, or prices fall because of a negative demand (money) shock does not capture the complexity of the historical experience of the pre-1896 period. Indeed, we find that prices fell as a result of a combination of negative money supply shocks and positive supply shocks.
|Date of creation:||Mar 2003|
|Date of revision:|
|Publication status:||published as Burdekin, Richard C. K. and Pierre L. Siklos (eds.) Deflation: Current and Historical Perspectives. New York: Cambridge University Press, 2004.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael D. Bordo & Ronald MacDonald, 1997. "Violations of the `Rules of the Game' and the Credibility of the Classical Gold Standard, 1880-1914," NBER Working Papers 6115, National Bureau of Economic Research, Inc.
- Bordo, Michael D. & Rockoff, Hugh & Redish, Angela, 1994. "The U.S. Banking System From a Northern Exposure: Stability versus Efficiency," The Journal of Economic History, Cambridge University Press, vol. 54(02), pages 325-341, June.
- Olivier Jean Blanchard & Danny Quah, 1988.
"The Dynamic Effects of Aggregate Demand and Supply Disturbance,"
497, Massachusetts Institute of Technology (MIT), Department of Economics.
- Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
- Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Gali, 1994.
"Sources of real exchange rate fluctuations: how important are nominal shocks?,"
Federal Reserve Bank of Dallas, issue Apr.
- Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
- Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
- Jordi Galí & Richard Clarida, 1993. "Sources of real exchage rate fluctuations: How important are nominal shocks?," Economics Working Papers 66, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1994.
- Clarida, Richard & Galí, Jordi, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," CEPR Discussion Papers 951, C.E.P.R. Discussion Papers.
- Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92, February.
- Charles W. Calomiris & Christopher Hanes, 1994. "Historical Macroeconomics and American Macroeconomic History," NBER Working Papers 4935, National Bureau of Economic Research, Inc.
- Keating, John W & Nye, John V, 1998. "Permanent and Transitory Shocks in Real Output: Estimates from Nineteenth-Century and Postwar Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 231-51, May.
- Michael Bordo, 1993.
"The Gold Standard, Bretton Woods and other Monetary Regimes: An Historical Appraisal,"
NBER Working Papers
4310, National Bureau of Economic Research, Inc.
- Michael D. Bordo, 1993. "The gold standard, Bretton Woods and other monetary regimes: a historical appraisal," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 123-191.
- Edward J. Chambers & Donald F. Gordon, 1966. "Primary Products and Economic Growth: An Empirical Measurement," Journal of Political Economy, University of Chicago Press, vol. 74, pages 315.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9520. 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: ()
If references are entirely missing, you can add them using this form.