Giuseppe Tullio

Inflation and Currency Depreciation in Germany. 1920-1923: A Dynamic Model of Prices and the Exchange Rate

This paper presents a dynamic model of the German hyperinflation, explaining prices, the exchange rate and the money supply. In the model estimated simultaneously, the nominal exchange rate is allowed to diverge from Purchasing Power Parity in the short run, the monetary approach to exchange rate determination and the quantity theory of money are assumed to be valid in the long run, the dynamic adjustment of prices and the exchange rate to monetary disturbances is made explicit, and currency substitution between domestic and foreign currency is introduced explicitly. The problem of the autocorrelation of the residuals of the money demand function found in previous studies is resolved, the fit of inflation and exchange rate changes is very satisfactory, and the speed of adjustment of the exchange rate to monetary disturbances is found to be much higher than for prices. Copyright 1995 by Ohio State University Press.

The German depression and the stock market crash of the thirties: The role of macropolicies and of the international business cycle

Abstract The paper analyses the main causes of the German depression of the late 1920s and compares the developments of the German stock market with those abroad. The economic slowdown started in Germany about one year earlier than in the U.S. and the stock market had been on a declining trend since early 1927. The main reasons of the slowdown were the fall in profit margins due to excessive real wage growth and the large German borrowing abroad. In addition a sharp drop in U.S. long term lending to Germany in late 1928 and 1929 resulted in a tightening of German monetary policy. The 1929 U.S. slowdown only aggravated a recession that was already under way, while there is no evidence that the decline of the German stock market exerted a significant influence on economic activity. In the second part of the paper a two equation model of German nominal income and the balance of payments is presented. Its aim is to measure the impact of domestic fiscal and monetary policy and of U.S. income on German income from 1925 to 1929.

A note on the real exchange rate, differential productivity growth and protectionism in gold standard germany, 1878–1913

note analyses the effects of differential productivity growth in the traded and non-traded goods sectors and of protectionism on the real exchange rate of Germany during the gold standard. Large deviations of the German real exchange rate occurred, despite the relatively open trading system and the high and increasing degree of commercial integration of Germany with the main gold standard countries. In Section II Balassas [1964] model, which explains long-run deviations of the exchange rate from purchasing power parity on the basis of differential productivity growth between the traded and the non-traded goods sector, has been modified to take into account the existence of tariffs. In Section III empirical tests of the model are presented. They show that both differential productivity growth and changes in the degree of protectionism were important in* explaining the behaviour of the real exchange rate. Two appendices are attached to the note. Appendix I complements the main analysis of the note by measuring the effect of changes in the degree of protectionism and in the real exchange rate on the German trade balance. Appendix II contains a description of the sources of the data used.

Monetary Policy and the Determinants of Gold-Flows in Gold Standard Germany: 1876–1913

This chapter focuses on the discount rate policy of the Reichsbank during the gold standard. It analyses by means of econometric techniques the economic factors which influenced the Reichsbank’s decisions to change the official discount rate. It also tries to answer the question of whether the Reichsbank followed the so-called ‘rules of the game’. At the risk of some oversimplification, the ‘rules of the game’ have been interpreted in the gold standard literature in three different ways: 1. A narrow interpretation, implying that a central bank followed the ‘rules of the game’ if its main concern was the covertibility of the currency and if it changed the discount rate in response to changes in its liquidity ratios. This interpretation seems to have been adopted by Goodhart (1972) in analysing the behaviour of the Bank of England. 2. A second interpretation, implying that a central bank followed ‘the rules of the game’l it changed its domestic assets in the same direction as its foreign assets in a given time interval, thus speeding up the balance-of-payments adjustment process. This interpretation was adopted by Bloomfield (1959); 3. A third interpretation, implying that a central bank followed the ‘rules of the game’ if the discount rate was changed so as to lead to an anti-cyclical behaviour of its assets and liabilities. This interpretation was adopted by McGouldrick (1984) in his analysis of the behaviour of the Reichsbank.

Long-Term Growth, Money and Inflation in Germany, 1880–1979: an Historical Overview

This chapter analyses by means of simple charts and tables the long-term economic development of the German economy from 1880 to 1979. Section 1.1 describes the various phases of economic growth in relation to developments of factors of production (labour and capital). Other factors influencing economic growth, as technical progress, changes in the degree of openness of the economy, investment in human capital and changes in the terms of trade and in taxation are also dealt with in this section. Section 1.2 analyses structural changes in aggregate demand while Section 1.3 describes developments of the major items of the balance of payments in the various stages of economic growth. Section 1.4 deals with the changing role of government in the economy, and structural changes in the fiscal system, while Section 1.5 concentrates on the changes in the structure of the monetary system, on monetary policy and inflation.

The Hyperinflation and Currency Depreciation in Germany, 1914–23

The worst inflation to plague Germany since unification occurred after the end of the First World War. For sixty months, between January 1919 and December 1923, the wholesale price index rose on average by 45.6 per cent per month. Like everyone else living through rapid inflation, the Germans directed their invectives against businessmen, the financial community and farmers, who were thought to have sold goods at higher than ‘fair’ prices. In fact, the rapid increase in the price level was caused by a rapid expansion of the stock of money induced by large government budget deficits.

An Annual Macroeconomic Disequilibrium Growth Model of the German Economy, 1880–1979

In this chapter a disequilibrium macroeconomic model of the German economy is presented. The model is specified in continuous time and is estimated from 1880 to 1979 on annual data. It explains the trends and fluctuations in the rate of capital accumulation, output, employment, and the balance-of-payments. Its long-run properties are founded in neoclassical theory. The main aims of the model are first, to explain the interdependence between the main economic aggregates in Germany during the last one hundred years and to show that despite enormous structural changes in the economy and changes in territory, the behaviour of the German private sector from 1880 to 1979 was stable. The model presented here and the description of the main economic developments presented in Chapter 1 are therefore highly complementary. The second aim is to test within the structural model the validity of the quantity theory of money as an hypothesis about the determination of the price level, and of the Fisher equation as an hypothesis about the determination of nominal interest rate, following Lucas’ (1980) suggestion. The third aim is to test by simulating the model to what extent the remarkable rate of growth of German real net national product per capita from 1950 to the end of the 1960s war affected previous war destructions and losses of territory.

The German Depression of the 1930s: the Role of Monetary Policy, Fiscal Policy, and of the International Business Cycle

In the economic literature there are three different explanations of the origin, the causes, and the length and depth of the 1929-33 world depression. The first one maintains that the depression had a single cause, namely errors in carrying out monetary policy in the United States. It argues that the origin of the depression was in the United States rather than in Europe, its causes were monetary rather than real and that they originated from policy rather than from the nature of institutions, both national and international. This point of view is best represented by Friedman and Schwartz (1963). They argued that the strong and prolonged decline in prices and real output in the world economy is to be attributed mainly to an unprecedented decline in the quantity of money in the United States. This fall in the money stock was largely caused by bank failures in the United States in 1930-33, although they argue it could have been prevented by active monetary policy. Meltzer (1976) also argued that inappropriate Federal Reserve policy in 1929-31 was at the origin of the strong decline in output and prices in the United States and with a lag in the rest of the world. According to Meltzer, this inappropriate monetary policy was due to the Federal Reserve System Board focusing on nominal interest rates and member banks borrowing as a measure of ease and tightness of policy. Hawtrey (1947) also held the view that restrictive monetary policy in the United States and the United Kingdom in 1928 and 1929 were at the origin of the depression. He maintained that France’s large gold acquisitions in those years had a major influence on the degree of restriction of monetary policy in the two reserve currency centres.