Working Paper: CEPR ID: DP3257
Authors: Hansjoachim Voth
Abstract: Asset price inflation presents central banks with a puzzle. I examine the case of Germany, 1925-7, when the Reichsbank intervened to bring down stock prices, rectify imbalances and curb speculation. Present value relations, comparisons with historical valuation measures and the time-series properties of the data suggest that there was no bubble in the German stock market. The German central bank under Hjalmar Schacht was therefore wrong to be concerned about stock prices, since no bubble can be discerned. I examine the effects of the misguided intervention by estimating a number of VARs. These suggest that a substantial part of the slowdown in the rate of capital formation after 1927 could have been avoided without the intervention.
Keywords: asset prices; bubbles; fixed exchange rates; foreign lending; Germany; monetary policy; stock market
JEL Codes: E31; E43; E44; N14; N24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in stock prices (G10) | fall in investment spending (E20) |
| Reichsbank intervention (E58) | uncertainty and weakened business confidence (E32) |
| uncertainty and weakened business confidence (E32) | fall in investment spending (E20) |
| Reichsbank intervention (E58) | downturn in German economy (F44) |
| decrease in stock prices (G10) | negative implications for household wealth and consumption (E21) |
| Reichsbank intervention (E58) | decrease in stock prices (G10) |
| Reichsbank intervention (E58) | fall in investment spending (E20) |