Shifts in the Nineteenth-Century Phillips Curve Relationship

Abstract

This paper examines shifts in the output effects of unanticipated inflation in the nineteenth-century United States by estimatinga Lucas-type aggregate supply function over the 1840-1900 period. It is shown that, in contrast to the twentieth-century experience in which there has been a pronounced movement toward greater cyclical price rigidity, the nineteenth-century output response to unanticipated price changes was roughly stable over the period. Such stability is also particularly interesting in view of the dramatic changes in communications and transportation technology, particularly the telegraph and the railroad, which greatly facilitated information flows and thereby should have forced the price-surprise coefficient downward. Other factors which may have offset the influence of these improvements in information technology on the price-surprise coefficient include the reduced general price level variability due to the gold standard in the postbellum period and the possibility that the net effects of such improvements may in fact have been small because shocks were able to spread more rapidly aswell. Finally, the perceived increase in cyclical price rigidity over the nineteenth century in the raw data is shown to have resulted not from a change in price-surprise coefficient hut rather from an increased degree of persistence or inertia in the economy.