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Volume 106
Issue 3
August 1991
Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard
Robert B. Barsky,
Robert B. Barsky
University of Michigan
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J. Bradford De Long
J. Bradford De Long
Harvard University
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The Quarterly Journal of Economics, Volume 106, Issue 3, August 1991, Pages 815–836,
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We examine interest and inflation rates from 1879 to 1913. Deflation prior to 1896 was followed by inflation. Average U. S. inflation was 3.1 percentage points higher in the years after 1896, yet nominal interest rates were no higher after 1896. This nonadjustment of nominal rates would be consistent with rational expectations if inflation was not forecastable, and indeed univariate tests show little sign of serial correlation. But gold production does forecast inflation. The relationship between mining and inflation was such that expected inflation should have risen 300 basis points between 1890 and 1910. We consider explanations of this failure to foresee the shift in inflation after 1896 and conclude that it is not persuasive evidence that investors ignored relevant information, but does suggest great uncertainty about the appropriate model for analyzing the economy.
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© 1991 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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