Journal: BEHL Working Paper Series

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Berkeley Economic History Laboratory (BEHL)

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20161
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  • Is Deflation Costly After All? Evidence from Noisy Historical Data
    Item type: Working Paper
    Kaufmann, Daniel (2016)
    BEHL Working Paper Series
    Measuring the link between deflation and depression is hampered by the errors-in-variables problem in historical CPI data. I replicate methodological deficiencies of 19th century retrospective CPI estimates for the US CPI from 1956 to 2015. The replications show that the deficiencies spuriously increase the volatility of inflation as well as the number of deflationary episodes, and they lower inflation persistence. I then account for measurement error, first by estimating an improved measure of the persistent and transitory part of inflation based on a factor model. Three out of four periods with persistent deflation are associated with depression. Moreover, there is a significant association between lower real activity and short-lived deflations, and this association is not limited to the Great Depression. Second, the results are confirmed by an IV-regression approach that uses an independent noisy proxy to instrument the error-ridden retrospective CPI.
Publications 1 - 1 of 1