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With a Bang, Not a Whimper: Pricking Germany's 'Stock Market Bubble' in 1927 and the Slide into Depression

Hans-Joachim Voth

No 3257, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 N14 N24 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mac
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