Forecasting Pre-World War I Inflation: The Fisher Effect Revisited

Robert B. Barsky, J. Bradford De Long

NBER Working Paper No. 2784
Issued in December 1988
NBER Program(s):Monetary Economics

We consider the puzzling behavior of interest rates and inflation in the United States and the United Kingdom between 1879 and 1913. A deflationary regime prior to 1896 was followed by an inflationary one from 1896 until the beginning of World War I; the average inflation rate was 3.8 percentage points higher in the second period than in the first. Yet nominal interest rates were no higher after 1896 than they had been before. This nonadjustment of nominal interest rates would be consistent with rational expectations if inflation were not forecastable, and indeed univariate tests show little sign of serial correlation in inflation. However, inflation was forecastable on the basis of lagged gold production. Investors' expectations of inflation should have risen by at least three percentage points in the United States between 1890 and 1910. We consider in an information processing context alternative ways of accounting for this failure of interest rates to adjust, for example the possible beliefs that increases in gold production might be transitory. We conclude that the failure of investors to exhibit foresight with regard to the shift in the trend inflation rate after 1896 is not persuasive evidence that investors were negligent or naive in processing information.

download in pdf format
   (579 K)

download in djvu format
   (313 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2784

Published: Quarterly Journal of Economics, Vol. 106, No.3, (August 1991), pp.815-36.

Users who downloaded this paper also downloaded* these:
Calomiris w15403 Banking Crises and the Rules of the Game
Mishkin and Simon w5080 An Empirical Examination of the Fisher Effect in Australia
Mishkin w3632 Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates
Rockoff w10580 Until it's Over, Over There: The U.S. Economy in World War I
Summers w0836 The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us