Thursday, March 23, 2017

Three centuries of dynamic equilibria in the UK

If the price level has a dynamic equilibrium (e.g. per the previous post or here), it should be interesting to look at some very long run historical data ‒ specifically this three century time series available for the UK. It turns out that there are two dynamic equilibria. The first hold from the 1600s to the early 1900s is associated with an inflation rate consistent with zero (call it the gold standard equilibrium); the second holding over the post WWII period is the one I've observed before (links at beginning of this paragraph) with an inflation rate of 2.6%:



The major shocks are centered at 1780.7, 1916.1, 1945.5, and 1976.1. My intuition is that these are associated with the industrial revolution, WWI, WWII, and women entering the workforce. However, I'm open to alternative theories. If you're looking for a demographic cause of the first shocks, there was a major change in population growth in the early 1800s associated with improved sanitation for example.

2 comments:

  1. I'm not much enamoured of your reliance on exogenous shocks, especially when you invoke drawn-out events like wars and women entering the workforce.
    However, if you dig down into history, I think there are some better candidates, at least in this case.
    1780.7 was the date of the Gordon Riots, the Bank of England was attacked.
    There was a lot going on in January 1916, but the introduction of conscription would have been a bit shocking.
    In early July 1945 the Labour Party won the general election in a landslide.
    In the second quarter of 1976 there was a (manufactured) financial crisis which marks the beginning of the Neoliberal era in the UK.

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    1. Thanks for the list of events.

      One reason I invoke drawn-out events is that the "steepness" parameter for the transitions (see here) are on the order of several years (7.4 years for the first shock, 3.4 years for the 1945 shock, and 2.7 years for the 1970s shock). These numbers indicate the "duration" of the transition and are similar to the standard deviation for a normal distribution.

      So for the 1780.7 shock, it takes 4 x 7.4 ~ 30 years for the middle 95% of it to pass. We therefore need an event that takes a generation, not a few days like the Gordon Riots. And the middle 95% corresponds to 1765.2 to 1794.8 (the middle 99% corresponds to 1757.8 to 1802.2), which roughly corresponds to the dates given to the industrial revolution by historians (e.g. 1760 to 1840 here).

      Likewise the 1945 shock would be about an event that occurs over the period 1939 to 1952 (the middle 95% of it), not a discrete event like an election. This matches up with WWII fairly well.

      Likewise the 1976 shock would be about an event that occurs over the period 1970 to 1980 (the middle 95% of it), not the few months of the IMF crisis.

      It's not just the timing, but also the duration of the transition that lead to me speculating using "drawn out" events.

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