Stock markets and business cycle comovement in Germany before World War I: Evidence from spectral analysis

Historical national account data are often plagued by quality problems, and rivaling series imply different business cycle chronologies. This problem is particularly grave for Germany before World War I [Burhop, C., Wolff, G.B., 2005. A compromise estimate of net national product and the business cycle in Germany 1851-1913. Journal of Economic History 65(3), 615-657]. We exploit the comovement between asset prices and various GNP estimates under the efficient market hypothesis to obtain an improved business cycle dating, and to decide between the various alternative national accounts series. We also examine the comovement between financial markets and various disaggregate indicators of real investment. Employing both time and frequency domain techniques, we find impressive comovement between the stock market, an estimate of the aggregate wage bill, and disaggregate evidence on real investment. Our findings confirm traditional business cycle chronologies for Germany and lead us to discard later, revisionist attempts to date the business cycle.