Title: On the cost of deflation: Evidence from noisy historical data
Authors: Daniel Kaufmann - University of Neuchatel (Switzerland) [presenting]
Abstract: The aim is to show that methodological deficiencies of 19th century retrospective CPI estimates spuriously increase the volatility of inflation as well as the number of deflationary episodes, and they lower inflation persistence. Against this backdrop, the link between real activity and deflation is revisited for the US from 1834 to 1945. First, an improved measure of inflation is estimated based on a factor model. Second, the results are confirmed by an IV-regression approach that uses an independent noisy proxy to instrument the error-ridden retrospective CPI. A significant association emerges between lower real activity and deflation, which is not limited to the Great Depression.