Working Papers

Contributions to the Berkeley Economic History Laboratory (BEHL) Working Papers series are from visitors and other affiliates of the BEHL. These papers are preliminary works, and their circulation is intended to stimulate discussion and comment. Please contact the author with comments or before referencing or quoting a paper. To inquire about contributing a working paper to the series contact Professor Barry Eichengreen.

Supply-Side Policies in the Depression: Evidence from France | BEHL WP2015-08 | Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland, July 2015. Abstract  The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented large-scale mandatory wage increases and hours restrictions. This quickly ended deflation, but output stagnated. We present time-series and cross-sectional evidence that the supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a two-sector model calibrated to match our cross-sectional estimates. We propose an alternative, disequilibrium model consistent with expansionary effects of lower real interest rates and contractionary effects of higher real wages. This model and our empirical evidence suggest that without supply-side problems, France would have recovered rapidly after leaving the gold standard.

Linkages and Economic Development | BEHL WP2015-07 |Dominick Bartelme and Yuriy Gorodnichenko, June 2015.   Abstract  Specialization is a powerful  source of productivity gains, but how production networks at the industry level are related to aggregate productivity in the data is an open question. We construct a database of input-output tables covering a broad spectrum of countries and times, develop a theoretical framework to derive an econometric specification, and document a strong and robust relationship between the strength of industry linkages and aggregate productivity. We then calibrate a multi- sector neoclassical model and use alternative identification assumptions to extract an industry-level  measure of distortions  in intermediate  input  choices.  We compute the aggregate losses from these distortions for each country in our sample and find  that they are quantitatively consistent with  the relationship  between industry linkages and aggregate productivity in the data. Our estimates imply that the TFP gains from eliminating these distortions are modest but significant, averaging roughly 10% for middle and low income countries.

Wall of Worries: Reflections on the Secular Stagnation Debate* | BEHL WP2015-06 | Barry Eichengreen, June 2015. * This article is reprinted, with permission, from IMES Discussion Paper Series 2015-E-5 © 2015 Bank of Japan. This paper is the text of the Mayekawa Lecture, delivered to the Bank of Japan-IMES annual conference in Tokyo on June 4-5, 2015.

Scale versus Scope in the Diffusion of New Technology | BEHL WP2015-05 | Daniel P. Gross, May 2015. Abstract Using the farm tractor as a case study, I show that lags in technology diffusion arise along two distinct margins: scale and scope. Though tractors are now used in nearly every agricultural field operation and in the production of nearly all crops, they first developed with much more limited application, and early diffusion was accordingly limited in scope until tractor technology generalized. Other historically important innovations share similar histories. The results suggest that the key to understanding technology diffusion is not only in explaining the number of different users, but also in explaining the number of different uses.

Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record | BEHL WP2015-04 | Andrew Jalil and Gisela Rua, April 2015.  Abstract  This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence—both quantitative and narrative—that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.

New Evidence on the Impact of Financial Crises in Advanced Countries | BEHL WP2015-03 | Christina D. Romer and David H. Romer, March 2015.  Abstract  This paper examines the aftermath of financial crises in advanced countries in the four decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967–2007. The series is based on assessments of the health of countries’ financial systems from a consistent, real-time narrative source; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable. We find that output declines following financial crises in modern advanced countries are highly variable, on average only moderate, and often temporary. One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself.

Doctrinal Determinants, Domestic and International, of Federal Reserve Policy 1914-1933 | BEHL WP2015-02 | Barry Eichengreen,  February 2015

If Not Malthusian, Then Why? | BEHL WP2015-01 | Lemin Wu, February 2015.     Abstract    This paper shows that merely the Malthusian mechanism cannot explain the pre-industrial stagnation of living standards. Technological improvement in luxury production, if faster than improvement in subsistence production, would have kept living standards growing. The Malthusian trap is essentially a puzzle of balanced growth between the luxury sector and the subsistence sector. The author argues that the balanced growth is caused by group selection in the form of biased migration. It is proved that a tiny bit of bias in migration can suppress a strong tendency of growth. The theory reexplains the Malthusian trap and the prosperity of ancient market economies such as Rome and Song. It also suggests a new set of triggering factors of modern economic growth.

The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound | BEHL WP 2014-05 | Richard Sutch, October 2014.  Abstract  The developed economies of Japan, the United States, and the Eurozone are currently experiencing very low short-term rates, so low that they are considered to be at the “zero lower bound” of possibility. This effectively paralyzes conventional monetary policy. As a consequence, monetary authorities have turned to unconventional and controversial policies such as “Quantitative Easing,” “Maturity Extension,” and “Low for Long Forward Guidance.” John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned in the current discussions because the subsequent simplifications and the bowdlerization of his model obliterated this detail. It was only later that his characterization of a lower bound to interest rates would be dubbed a “Liquidity Trap.” This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.

The Rule of Karlowitz: Fiscal Change and Institutional Persistence | BEHL WP 2014-04 | Elira Karaja, February 2014.   Abstract   Could the empires that ruled Eastern Europe for centuries and the formal institutions that they implemented have left an imprint on current formal and informal institutions of modern states? This paper sheds light on the legacy of the Ottoman Empire’s administrative system in contemporary states in the region. I investigate a causal mechanism that led to divergent paths of state building and rule of law, interpreted as attitudes toward corruption. The boundary between the Ottoman Empire and the Austro-Hungarian Empire was set in the Treaty of Karlowitz in 1699, contemporaneous with a fiscal shock and a crucial change in the Ottoman fiscal system. This is identified as the historical treatment effect. The analytical narrative focus on effects of tax system change, which encouraged uncontrolled predatory behavior, spread of abuse and rent extraction in the Ottoman Empire. Using Geographic Information System methods and regression discontinuity analysis with household survey data, I investigate the persistence of different attitudes about bribery on both sides of of  the former border. Findings evidence higher willingness to bribe on the Ottoman hereditary lands. These findings are robust to controls. Last, the persistent effect of weak institutions on growth is estimated using household consumption and light intensity data as proxies for development.

War and Progressive Income Taxation in the 20th Century | BEHL WP 2014-03 | Juliana Londono Velez, September 2014.   Abstract    I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. I obtain long-run series of the top marginal personal income tax rate for a large sample of OECD countries, and use data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage (2012) to test this hypothesis. My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity. These effects are persistent and do not vanish upon the conclusion of war.

Breaking the Unbreakable Union:Nationalism, Trade Disintegration and the Soviet Economic Collapse | BEHL WP 2014-02 | Marvin Suesse, May 2014.   Abstract   The breakup of the Soviet Union provides evidence for the detrimental effects of secessionist conflict on domestic integration and economic growth. This paper shows that the increased likelihood of secessions by the Union’s member republics in the late 1980s strongly reduced internal Union trade. Economic disintegration thus proceeded along internal borders and preceded the Soviet Union’s official dissolution. This helps to explain the severity of the output fall in the late Soviet period. Methodologically, these results stem from an empirical gravity framework, which is derived from first principles by a game-theoretic modeling of Soviet internal trade. Exogenous variation in nationalist agendas, namely the desire to preserve national languages, is used to preclude endogeneity running from trade patterns to secession.

Antisemitism Affects Households’ Investments | BEHL WP2014-01 | Francesco D’Acunto, Marcel Prokopczuk,  and Michael Weber, December 2013.   Abstract  We propose historical anti-Jewish sentiment as a proxy for distrust in financial markets. Households in German counties where Jews were persecuted the most as far back as in the Middle Ages are less likely to invest in stocks today. A one-standard-deviation increase in historical anti-Jewish violence leads to a 7.5% to 12% drop in the average stock market participation. For identification, we exploit the forced migrations of Ashkenazi Jews out of the Rhine Valley after the 11th century. The distance of a county from the Rhine Valley instruments for the existence of a Jewish community during the Black Death (1349) and hence the early emergence of anti-Jewish sentiment. Results are similar when we use the votes for the Nazi party as a proxy for anti-Jewish sentiment. The magnitude of the effect does not change from 1984 until 2011 nor across cohorts. Anti-Jewish sentiment does not capture generalized trust:  its effect on stockholdings is similar across counties and households with dfferent levels of education.

Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010 | BEHL WP2013-10 | Thomas Piketty and Gabriel Zucman, 26 July 2013 |  Abstract  How do aggregate wealth-to income ratios evolve in the long run and why? We address this question using 1970-2010 national balance sheets recently compiled in the top eight developed economies. For the U.S., U.K., Germany, and France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise of wealth-income ratios in recent decades, from about 200-300% in 1970 to 400-600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries(600-700%). This can be explained by a long run asset price recovery (itself  driven  by changes in capital policies since the  world wars) and by the  slowdown of productivity and population growth,  in line  with  the  ß = s/g  Harrod-Domar-Solow formula. That is, for a given net saving rate s = 10%, the long run wealth-income ratio ß  is about 300% if g = 3%, and 600% if g = 1.5%. Our results have important implications for capital taxation and regulation and shed new light on the changing nature of wealth, the shape of the production function, and the rise of capital shares.

Railroad Expansion and Entrepreneurship: Evidence from Meiji Japan | BEHL WP2013-09 | John Tang, September 2013 | Abstract Railroads in Meiji Japan are credited with
facilitating factor mobility as well as access to human  and financial capital, but the direct impact on firms is unclear. Using prefecture‐level industry data and a difference-in- differences model that exploits the temporal and spatial variation of railroad expansion, I
assess the relationship between railways and firm activity across Japan. Results indicate that while rail access corresponds to lower firm numbers, total and average firm capitalization increase after controlling for market size and geography. These latter findings apply particularly to the manufacturing and service sectors, respectively, and coupled with decreased firms activity in areas with longer coastlines and larger populations, are consistent with industrial agglomeration and slower industrial growth in newly integrated markets.

The Eurozone Crisis: Phoenix Miracle or Lost Decade? | BEHL WP2013-08 | Barry Eichengreen, Naeun Jung, Stephen Moch and Ashoka Mody, May 2013

The Mother of All Sudden Stops: Capital Flows and Reversals in Europe, 1919-1932  |  BEHL WP2013-07 | Olivier Accominotti and Barry Eichengreen, July 2013 | Abstract  We present new data documenting European capital issues in major financial centers from 1919 to 1932. Push factors (conditions in international capital markets) perform better than pull factors (conditions in the borrowing countries) in explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centers at the end of the 1920s figured importantly in the decline in foreign lending. We draw parallels with Europe today.

Fiscal Policy and Economic Recovery: The Case of the 1936 Veterans’ Bonus | BEHL WP2013-06 | Joshua K. Hausman, June 2013 | Abstract  Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. This paper shows that fiscal policy, though inadvertent, was tried in 1936, and a variety of evidence suggests that it worked. A deficit-financed veterans’ bonus provided 3.2 million World War I veterans with cash and bond payments totaling 2 percent of GDP; the typical veteran received a payment equal to annual per capita personal income. This paper uses time-series and cross-sectional data to identify the effects of the bonus. I exploit four sources of quantitative evidence: a detailed household consumption survey, cross-state and cross-city regressions, aggregate time-series, and a previously unused American Legion survey of veterans. The evidence paints a consistent picture in which veterans quickly spent the majority of their bonus. Spending was concentrated on cars and housing in particular. Narrative accounts support these quantitative results. A simple calculation suggests that the bonus added 2.5 to 3 percentage points to 1936 GDP growth.

The Political Economy of Educational Content and Development: | BEHL WP2013-05 | Davide Cantoni and Noam Yuchtman, 21 March 2013 | Abstract  Beyond years of schooling, educational content can play an important role in the process of economic development. Individuals’ choices of educational content are often shaped by the political economy of government policies that determine the incentives to acquire various skills. We first present a model in which differences in human capital investments emerge as an equilibrium outcome of private decisions and government policy choices. We then illustrate these dynamics in two historical circumstances. In medieval Europe, states and the Church found individuals trained in Roman law valuable, and eventually supported productive investments in this new form of human capital. In late 19th-century China, elites were threatened by the introduction of Western science and engineering and continued to select civil servants—who enjoyed substantial rents—based on their knowledge of the Confucian classics; as a result, investments in productive, modern human capital were not made.

The Rise of Services and the Lengthening of Economic Recovery| BEHL WP2013-04 | Martha L. Olney and Aaron Pacitti, May 2015| This is a revision of the December 2013 paper titled “Goods, Services, and the Pace of Economic Recovery.”  Abstract  We argue that the shift to a service-producing economy in the United States has had macroeconomic repercussions not previously considered, lengthening recovery from recessions. The effect operates through anticipations and export channels. Using a model that distinguishes between goods and services, and testing it with U.S. state-level employment data for post-1960 recessions, we find that increased production of services relative to goods lengthens trough-to-peak recoveries. We also find limited evidence that increased services lengthens and deepens peak-to-trough downturns. The rise in service production in the United States over the last half-century lengthens the recovery from recessions by about 75 percent.  Read the INET blog comments about this paper.

The Grammatical Origins of Gender Roles | BEHL WP2013-03 | Victor Gay, Estefania Santacreu-Vasut and Amir Shoham, 22 April 2013 | Abstract   We investigate the relation between gender marking in grammar and female participation in the labor market, the credit market, land ownership, and politics. Cross-country and individual-level analyses reveal that women speaking languages that more pervasively mark gender distinctions are less likely to participate in economic and political life and more likely to encounter barriers in their access to land and credit. These findings are robust to a large set of controls and robustness checks. We also found that the impact of a language’s gender structure remains after controlling for culture, for historical agricultural use of the plough.

Financing a Planned Economy: Institutions and Credit Allocation in the French Golden Age of Growth (1954-1974) | BEHL WP2013-02 | Eric Monnet, September 2012 | Abstract  The role of banking and finance in the Golden Age of European growth (1950-1973) is very little known and widely underestimated. This paper studies the French system of economic planning and investment-based strategy that enhanced medium and long-term financing (called “investment credit” at that time). First, I describe the new institutions that were built after WWII to organize credit allocation. I especially highlight the role of the central bank through the National Credit Council. I then use a newly constructed database that matches the amount of credit (that had to be registered at the Banque of France) in 49 sectors to corporate tax sectoral statistics. It shows a significant positive relationship between investment credit and the marginal product of capital. The allocation of medium/long-term credit managed to favor the allocation of productive capital across sectors and thus to ensure the catch-up process. Using GMM estimations in order to avoid the endogeneity bias, I find that the effect of “investment credit” on growth is significant and positive, contrary to short-term credit which did not play any role for investment. Understanding the institutional framework that shaped the mechanisms and success of credit policy in the French mixed economy during the 50s and 60s also helps to understand its failures during the mid-70s.

State Capacity and Long-Run Performance | BEHL WP2013-01 | Mark Dincecco & Gabriel Katz, October 2012 | Abstract We present new evidence about the long-term links between state capacity and economic performance. Our database is novel and spans 11 countries and 4 centuries in Europe, the birthplace of modern economic growth. Using standard panel data methods, we find that the performance impacts of states with modern extractive and productive capabilities are significant, large, and robust to a wide variety of specifications, controls, and modeling techniques.