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Stock Markets and Business Cycle Comovement in Germany before World War I: Evidence from Spectral Analysis

  • Albrecht Ritschl
  • Martin Uebele

This paper examines the comovement of the stock market and of real activity in Germany before World War I under the effcient 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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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-056.

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Length: 36 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2005-056
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