Historical Business Cycles and Market Integration: Evidence from Comovement

This thesis addresses historical business cycles and market integration in Europe and America in the 19th and 20th centuries. For the analysis of historical business cycles, the widely used methodology of historical national accounting is complemented with a dynamic factor model that allows for using scarce historical data efficiently. In order to investigate how national and international markets developed since the early 1800s, a multivariate dynamic factor model is used. Spectral analysis helps in measuring frequency specific correlation between financial indicators and rivaling national income estimates for Germany between 1850 and 1913. One result is that the historical stock market index used helps to discriminate between competing estimates of German national income. A dynamic factor estimated from a broad time series data set confirms this result. Sub-indices for agriculture and industry suggest that the German economy industrialized earlier than evidence from national accounting shows. The finding for the U.S. business cycle is that relaxing the assumption of constant structural parameters yields higher postwar aggregate volatility relative to the period before World War I. Concerning market integration, it is found that European wheat markets integrated faster before mid-19th century than after. Thus, the impact of the metal hull and steam ship as well as the relevance of American wheat for the world wheat market have perhaps been overstated.