Estimation of Historical Inflation Expectations

The final version of my paper "Estimation of Historical Inflation Expectations" is now available online in the journal Explorations in Economic History. (Ungated version here.)

Abstract: Expected inflation is a central variable in economic theory. Economic historians have estimated historical inflation expectations for a variety of purposes, including studies of the Fisher effect, the debt deflation hypothesis, central bank credibility, and expectations formation. I survey the statistical, narrative, and market-based approaches that have been used to estimate inflation expectations in historical eras, including the classical gold standard era, the hyperinflations of the 1920s, and the Great Depression, highlighting key methodological considerations and identifying areas that warrant further research. A meta-analysis of inflation expectations at the onset of the Great Depression reveals that the deflation of the early 1930s was mostly unanticipated, supporting the debt deflation hypothesis, and shows how these results are sensitive to estimation methodology.

This paper is part of a new "Surveys and Speculations" feature in Explorations in Economic History. Recent volumes of the journal open with a Surveys and Speculations article, where "The idea is to combine the style of JEL [Journal of Economic Literature] articles with the more speculative ideas that one might put in a book – producing surveys that can help to guide future research. The emphasis can either be on the survey or the speculation part." Other examples include "What we can learn from the early history of sovereign debt" by David Stasavage, "Urbanization without growth in historical perspective" by Remi Jedwab and Dietrich Vollrath, and "Surnames: A new source for the history of social mobility" by Gregory Clark, Neil Cummins, Yu Hao, and Dan Diaz Vidal. The referee and editorial reports were extremely helpful, so I really recommend this if you're looking for an outlet for a JEL-style paper with economic history relevance.

My paper grew out of a chapter in my dissertation. I was interested in inflation expectations in the Great Depression after serving as a discussant for a paper by Andy Jalil and Gisela Rua on "Inflation Expectations and Recovery from the Depression in 1933:Evidence from the Narrative Record." I also remember being struck by  Christina Romer and David Romer's, (2013, p. 68) remark that a whole “cottage industry” of research in the 1990s was devoted to the question of whether the deflation of 1930-32 was anticipated.
I found it interesting to think about why different papers came to different estimates of inflation expectations in the Great Depression by examining the methodological issues around estimating expectations when direct survey or market measures are not available. I later broadened the paper to consider the range of estimates of inflation expectations in the classical gold standard era and the hyperinflations of the 1920s.

A lot of my research focuses on contemporary inflation expectations, mostly using survey-based measures. Some of the issues that arise in characterizing historical expectations are still relevant even when survey or market-based measures of inflation expectations are readily available--issues of noise, heterogeneity, uncertainty, time-varying risk premia, etc. I hope this piece will also be useful to people interested in current inflation expectations in parts of the world where survey data is unreliable or nonexistent, or where markets in inflation-linked assets are underdeveloped.

What I enjoyed most about writing this paper was trying to determine and formalize the assumptions that various authors used to form their estimates, even when these assumptions weren't laid out explicitly. I also enjoyed conducting my first meta-analysis (thanks to the recommendation of the referee and editor.) I found T. D. Stanley's JEL article on meta-analysis to be a useful guide.