Deflation, Productivity Shocks and Gold: Evidence from the 1880–1914 Period

In this paper we examine the sources and impact of deflation on the growth experiences of the four dominant countries on the gold standard in the period 1880–1913: the United States, The United Kingdom, France and Germany. We distinguish between good deflation, (driven by positive aggregate supply s...

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Bibliographic Details
Published in:Open economies review 2010-09, Vol.21 (4), p.515-546
Main Authors: Bordo, Michael D., Landon-Lane, John, Redish, Angela
Format: Article
Language:English
Subjects:
19th century
Decomposition
Deflation
Development Economics
Economic growth
Economic history
Economic models
Economic Policy
Economic theory
Economics
Economics and Finance
European Integration
Gold standard
Great Depression
Inflation
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Price levels
Prices
Productivity
Research Article
Studies
Supply & demand
Trends
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Summary:In this paper we examine the sources and impact of deflation on the growth experiences of the four dominant countries on the gold standard in the period 1880–1913: the United States, The United Kingdom, France and Germany. We distinguish between good deflation, (driven by positive aggregate supply shocks) and bad deflation (driven by aggregate demand shocks). We use an empirical Blanchard/Quah model which decomposes the behaviour of prices, output and the money stock into the impact of shocks such as a world price level shock, a domestic supply shock, and domestic demand shocks including a shock to the domestic gold stock. Our key finding is that the European economies were essentially classic in the sense that output was mainly supply driven and that money was neutral even when country specific gold stocks are included. In the United States, however, we observe both good and bad deflation.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-010-9165-1