Is deflation costly after all? The perils of erroneous historical classifications
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Date
2020-08
Publication Type
Journal Article
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yes
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Abstract
I estimate average economic activity during periods of inflation and deflation while accounting for measurement errors in 19th century prices. These measurement errors lead to underestimation (overestimation) of economic activity during periods of inflation (deflation). By exploiting multiple deflation indicators, it is possible to recover the true relationship; the shortfall of US industrial production growth during periods of deflation ranges from −4.5 pp to −7.6 pp, instead of −2 pp. I also find a negative relationship between deflation and real activity in the UK. I then examine the cross‐country variation in the estimates for eleven countries. The patterns are consistent with stronger biases for countries with more serious measurement errors in prices.
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Publication status
published
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Book title
Journal / series
Volume
35 (5)
Pages / Article No.
614 - 628
Publisher
Wiley