Correlation between deflation and depression?

[phattonez]

Here we examine the empirical relationship between deflation and depression in a broad historical context, including but not limited to the Great Depression. We use a panel data set on inflation and real output growth for 17 countries and more than 100 years. To focus on medium-term fluctuations, we break the time series on inflation and real output growth for each country into five-year episodes, and for each episode, we compute the average annual inflation rate and the average annual real output growth rate. For any episode, we define a deflation as a negative average inflation rate and a depression as a negative average real output growth rate. Throughout, we restrict attention to moderate inflations, those with average annual inflation below 20 percent.

Our main finding is that the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929—34). We find virtually no evidence of such a link in any other period. Here we have made no attempt to distinguish anticipated from unanticipated deflations, while theory, of course, makes a sharp distinction. Optimal monetary policy in a broad class of models with nominal rigidities dictates engineering small anticipated deflations and avoiding unanticipated deflations altogether. To the extent that the deflation in the Great Depression is thought of as unanticipated, as in most existing theories, this episode is not relevant for evaluating the costs of anticipated deflation. Our finding thus suggests that policymakers’ fear of anticipated policy-induced deflation that would result from following, say, the Friedman rule is greatly overblown.

http://minneapolisfed.org/research/sr/sr331.pdf

Is 5 years too long for this study to be valuable? Just thought it was an interesting find.

 

[Missed AB]

http://minneapolisfed.org/research/sr/sr331.pdf

Is 5 years too long for this study to be valuable? Just thought it was an interesting find.

Just my opinion, but I don't think 5 years is too long for a study like this since there are usually years in between new sets of data in this type study.

I didn't read the study, only what you cut and pasted. The study part that you posted doesn't seem to address the monetary policies typically used recession times to increase the money supply to prevent deflation.

The policy makers seem to have made the connection that inflation is the cause of economic growth, and not that inflation is the effect of economic growth. :/

Money table

http://economics.about.com/gi/o.htm...deralreserve.gov/releases/H6/hist/h6hist1.txt

 

[Gipper]

From what I've read, it seems too microcosmic. Seventeen nations in the example could be experiencing other external issues. Like with Chile in the 70s, hyperinflation could be just as attributed to political unrest as Marxist-led Allende was in the throes of being ousted as it could be with gross monetary expansion.

Having said that, you would think that the two are definitely correlated. The only options that could really run counterintuitive to the claim would be nations who like to a) really go into ForEx markets, b) stay on the winning side of the import/export game, and c) wildly and frequently manipulate their currencies according to cycles. Therefore, if China had come up with these two factors I'd look at other things, but with most nations I'd just call it as it is.

 

[Bigfoot 88]

I heard about this study and was going to post it but found this thread so I will just bump it.