THE IMPACT OF INFLATION ON PROPERTY CRIME

I. INTRODUCTION A large empirical literature examines the link between macroeconomic conditions and aggregate crime rates. The majority of studies focus on the relationship between unemployment and crime (e.g., Cantor and Land 1985; Greenberg 2001a, 2001b), but three studies also explore the impact of the inflation rate on crime (Devine, Sheley, and Dwayne Smith 1988; Land and Felson 1976; Tang and Lean 2007). The studies that focused on the link between economic conditions and crime are evenly split between aggregate time-series studies and those using individuallevel data. Although individual-level data have the advantage of being able to control for a large number of individual influences, they also have disadvantages. The analysis of such data can make it more difficult to identify the impact of long-run swings in key variables that drive crime rates, such as demographic trends. Furthermore, there is no direct way to predict the quantitative importance at the aggregate level of changes in macroeconomic variables. As policy debates are often driven by aggregate data and the simple juxtaposition of trends, such as declining crime rates and rising gun sales, it is, therefore, useful to investigate in more detail what aggregate data reveal about the determinants of property crime. Our study is motivated by an apparent association between property crime and inflation. The property crime rate has been declining since the early 1990s, while inflation has been very low at the same time. Spikes of inflation in the past have coincided with spikes in property crime (e.g., see Figures 1 and 2 with a focus on 1980s). The question arises whether this is a series of coincidences or evidence of a systematic relationship. For a systematic relationship to exist, a theoretical link needs to exist between property crime and inflation. We develop such a theory in this study. However, even if one can establish a theoretical link, the previous literature suggests that finding convincing empirical evidence is difficult. A particular problem in this context, which is present in many previous studies in the economics-of-crime literature, is the existence of pre-existing trends and, related to that, the endogeneity of criminal deterrence efforts. Omitting theoretically relevant variables, such as criminal deterrence, from a standard regression can be problematic, as it can bias the coefficient estimates for the variable(s) of interest. The potential problems that stem from omitting a deterrence variable and pre-existing trends are substantially mitigated in the present study by the use of an unobserved component modeling (UCM) approach (see Commandeur and Koopman 2007; Durbin and Koopman 2001; Harvey 1989,1997; and Harvey, Koopman, and Shephard 2004). UCMs typically include a stochastic trend that allows one to capture the influence of omitted and/or unobserved variables, allowing us to produce meaningful estimates of inflation's impact on property crime. [FIGURE 1 OMITTED] In this study, we focus on estimating the impact of inflation on four property crime rates using data from the United States. In particular, we allow for different responses of larceny, burglary, robbery, and auto theft rates. The data used in our analysis cover more than half a century. The lengthy span of the sample allows us to control explicitly for cyclical effects and, perhaps more importantly, demographic change, which is potentially an important driver of underlying or pre-existing trends in crime rates (see Nunley, Seals, and Zietz 2011). We find a statistically robust, economically significant link between headline inflation--a weighted average of core inflation and inflation in food and energy--and each type of property crime. The magnitude of headline inflation's impact varies by the type of property crime, but it is important to note that the levels of the crime rates vary widely as well. In addition, headline inflation in the previous year tends to have a larger impact on property crime than inflation that occurs contemporaneously, which suggests that criminal activity takes some time to adjust to changes in economic incentives. …