Unmasking the significance of uncertainty: a case study of the German interwar economy (1919-1935)

Dan Schläger

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper offers a comprehensive examination of the role played by economic policy uncertainty in shaping the historical trajectory of interwar Germany. The central argument posits that economic policy uncertainty constituted a significant destabilising force during this tumultuous period, a proposition substantiated through a blend of qualitative and quantitative evidence. A qualitative investigation grounded in historical newspaper records unveils hesitancy among both companies and households due to uncertainty about fiscal, monetary, and reparation policies. Companies delayed investments due to high irreversible costs during uncertain times, while households adopted a 'wait and see' approach by postponing consumption decisions. This uncertainty stemmed from a lack of clarity about the country's direction, curtailing the joy of creation and commercial enthusiasm, which led to a slackening of economic impetus. On a quantitative front, constructing a novel newspaper-based uncertainty index in conjunction with vector autoregression analysis, this research establishes a resilient linkage between economic policy uncertainty and a cascade of adverse macroeconomic consequences. Remarkably, up to one-third of the overall macroeconomic volatility can be attributed to the pervasive uncertainty surrounding economic policies between 1925 and 1935. Consequently, this research suggests that a veil of uncertainty hung over the German interwar economy, paralysing sustainable recovery in the aftermath of World War I.

JEL-codes: N14 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2024-03-01
New Economics Papers: this item is included in nep-his and nep-hpe
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