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AbstractWe use a Bayesian dynamic factor model to measure Germany's pre World War I economic activity. The procedure makes better use of existing time series data than historical national accounting. To investigate industrialization we propose to look at comovement between sectors. We find that Germany's industrial sector developed earlier than stated in the literature, since after the 1860s agricultural time series do not comove with the business cycle anymore. Also, the bulk of comovement between 1820 and 1913 can be traced back to five out of 18 series representing industrial production, investment and demand for industrial inputs. Our factor is impressingly confirmed by a stock price index, leading the factor by 1-2 years. We also find evidence for early market integration in the 1820s and 1830s. Our business cycle dating aims to resolve the debate on German business cycle history. Given the often unsatisfactory quality of national accounting data for the 19th century we show the advantage of dynamic factor models in making efficient use of rare historical time series.
This paper examines the comovement of the stock market and of real activity in Germany before World War I under the efficient market hypothesis. We employ multivariate spectral analysis to compare rivaling national product estimates to stock market behavior in the frequency domain. Close comovement of one series with the stock market enables us to decide between various rivaling business cycle chronologies. We find that business cycle dates obtained from deflated national product series are severely distorted by interference with the implicit price deflator. Among the nominal series, the income estimate of Hoffmann (1965) correlates best with the stock market, while the tax based estimate of Hoffmann and Müller (1959) is too smooth especially before 1890. We find impressive comovement between the stock market and nominal wages, a sub-series of Hoffmann's income estimate. We can show that a substantial part of this nominal wage series is driven by data on real investment activity. Our findings confirm the traditional business cycle chronology for Germany of Burns and Mitchell (1946) and Spiethoff (1955), and lead us to discard later, rivaling business cycle chronologies.
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