Why price inflation in developed countries is systematically underestimated
There is an extensive historical dataset on real GDP per capita prepared by Angus Maddison. This dataset covers the period since 1870 with continuous annual estimates in developed countries. All time series for individual economies have a clear structural break between 1940 and 1950. The behavior before 1940 and after 1950 can be accurately (R2 from 0.7 to 0.99) approximated by linear time trends. The corresponding slopes of regressions lines before and after the break differ by a factor of 4 (Switzerland) to 19 (Spain). We have extrapolated the early trends into the second interval and obtained much lower estimates of real GDP per capita in 2011: from 2.4 (Switzerland) to 5.0 (Japan) times smaller than the current levels. When the current linear trends are extrapolated into the past, they intercept the zero line between 1908 (Switzerland) and 1944 (Japan). There is likely an internal conflict between the estimating procedures before 1940 and after 1950. A reasonable explanation of the discrepancy is that the GDP deflator in developed countries has been highly underestimated since 1950. In the USA, the GDP deflator is underestimated by a factor of 1.4. This is exactly the ratio of the interest rate controlled by the Federal Reserve and the rate of inflation. Hence, the Federal Reserve actually retains its interest rate at the level of true price inflation when corrected for the bias in the GDP deflator.
|Date of creation:||27 May 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
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.:
- Michelacci, C. & Zaffaroni, P., 1998.
"(Fractional) Beta Convergence,"
9803, Centro de Estudios Monetarios Y Financieros-.
- Michelacci, C. & Zaffaroni, P., 2000. "(Fractional) Beta Convergence," Papers 383, Banca Italia - Servizio di Studi.
- Claudio Michelacci & Paolo Zaffaroni, 2000. "(Fractional) Beta Convergence," Temi di discussione (Economic working papers) 383, Bank of Italy, Economic Research and International Relations Area.
- Juan Carlos Cuestas & Dean Garratt, 2008.
"Is real GDP per capita a stationary process? Smooth transitions, nonlinear trends and unit root testing,"
2008/12, Nottingham Trent University, Nottingham Business School, Economics Division.
- Juan Cuestas & Dean Garratt, 2011. "Is real GDP per capita a stationary process? Smooth transitions, nonlinear trends and unit root testing," Empirical Economics, Springer, vol. 41(3), pages 555-563, December.
- Beechey, Meredith & Österholm, Pär, 2008. "Revisiting the uncertain unit root in GDP and CPI: Testing for non-linear trend reversion," Economics Letters, Elsevier, vol. 100(2), pages 221-223, August.
- Guglielmo Maria Caporale & Luis A. Gil-Alana, 2009.
"Long Memory in US Real Output per Capita,"
Discussion Papers of DIW Berlin
891, DIW Berlin, German Institute for Economic Research.
- Vougas, Dimitrios V., 2007. "Is the trend in post-WW II US real GDP uncertain or non-linear?," Economics Letters, Elsevier, vol. 94(3), pages 348-355, March.
- Ben-David, D. & Lumsdaine, L.R. & Papell, D.H., 1996.
"Unit Roots Postwar Slowdowns and Long-Run Growth: Evidence from Two Structural Breaks,"
33-96, Tel Aviv.
- Dan Ben-David & Robin L. Lumsdaine & David H. Papell, 2003. "Unit roots, postwar slowdowns and long-run growth: Evidence from two structural breaks," Empirical Economics, Springer, vol. 28(2), pages 303-319, 04.
- Dan Ben-David & Robin L. Lumsdaine & David H. Papell, 1998. "Unit Roots, Postwar Slowdowns and Long-Run Growth: Evidence from Two Structural Breaks," NBER Working Papers 6397, National Bureau of Economic Research, Inc.
- Kitov, Ivan, 2006.
"Real GDP per capita in developed countries,"
2738, University Library of Munich, Germany.
- repec:ebl:ecbull:v:3:y:2008:i:2:p:1-11 is not listed on IDEAS
- Laura Mayoral, 2006.
"Further Evidence on the Statistical Properties of Real GNP,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 68(s1), pages 901-920, December.
- Laura Mayoral, 2005. "Further evidence on the statistical properties of real GNP," Economics Working Papers 955, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2006.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:39059. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.