Proposal preview

Growth and business cycle stability: lessons from economic history

In the last decades, economic historians have been developing long-run data which permits testing competing economic theories. In this session we consider lessons for macroeconomic theory and policy derived from new research on long-run economic history. One paper uses a dataset representing close to 90% of world long-term capital flows prior to 1913 to test the growth impact of foreign capital in developing nations. Another paper investigates how fiscal capacity contributed to dampening the cyclical component of government revenues during the interwar and the Great Depression. A third paper provides historical evidence that education and fertility are endogenous to economic circumstances, using evidence from the introduction of a tariff on cereals in France in the late 19th century. The last paper finds that the monetary shock from the discovery of precious metals in America from the 16th century had a large and persistent real effect in 6 European nations.

Organizer(s)

  • Nuno Palma University of Manchester nuno.palma@manchester.ac.uk

Session members

  • Vicent Bignon , Banque de France
  • Rui Esteves, University of Oxford
  • Nuno Palma, University of Groningen
  • Andrea Papadia, LSE
  • Alba R. Marin, University of Barcelona
  • James Foreman-Peck, University of Cardiff
  • Peng Zhou, University of Cardiff
  • Jérémie Cohen-Setton, Peterson Institute for International Economics
  • Egor Gornostay, Peterson Institute for International Economics

Discussant(s)

  • Vicent Bignon Banque de France vincent.bignon@banque-france.fr
  • Rui Esteves University of Oxford rui.esteves@economics.ox.ac.uk
  • Nuno Palma University of Manchester nuno.palma@manchester.ac.uk
  • Andrea Papadia LSE A.papadia@lse.ac.uk
  • Alba R. Marin University of Barcelona alba_roma@me.com
  • James Foreman-Peck University of Cardiff Foreman-PeckJ@cardiff.ac.uk
  • Jérémie Cohen-Setton Peterson Institute for International Economics JCohenSetton@piie.com

Papers

Panel abstract

In the last decades, economic historians have been developing long-run data which permits testing competing economic theories. In this session we consider lessons for macroeconomic theory and policy derived from new research on long-run economic history. One paper uses a dataset representing close to 90% of world long-term capital flows prior to 1913 to test the growth impact of foreign capital in developing nations. Another paper investigates how fiscal capacity contributed to dampening the cyclical component of government revenues during the interwar and the Great Depression. A third paper provides historical evidence that education and fertility are endogenous to economic circumstances, using evidence from the introduction of a tariff on cereals in France in the late 19th century. The last paper finds that the monetary shock from the discovery of precious metals in America from the 16th century had a large and persistent real effect in 6 European nations.

1st half

Fiscal Capacity and the (In-)Stability of Government Financing in the Interwar Period

Andrea Papadia

Large volatility in government financing can disrupt the functioning of states, reduce the space for fi scal policy and increase overall uncertainty. In the interwar years, and during the Great Depression in particular, many countries experienced major cyclical swings in their fiscal aggregates. This paper investigates how countries' fi scal development interacted with economic conditions to determine the evolution of government nancing. The results highlight an important role for scal capacity in reducing its cyclical volatility. The evidence also indicates that this smoothing effect worked principally by facilitating more fi scally able countries' access to borrowing. These ndings indicate that interwar governments were constrained in their actions by past investments aimed at developing their fiscal systems, and not just Gold Standard membership. They also support the hypothesis that institutionallybased borrowing constraints can play an important role in fiscal policy procyclicality.

Large volatility in government financing can disrupt the functioning of states, reduce the space for fi scal policy and increase overall uncertainty. In the interwar years, and during the Great Depression in particular, many countries experienced major cyclical swings in their fiscal aggregates. This paper investigates how countries' fi scal development interacted with economic conditions to determine the evolution of government nancing. The results highlight an important role for scal capacity in reducing its cyclical volatility. The evidence also indicates that this smoothing effect worked principally by facilitating more fi scally able countries' access to borrowing. These ndings indicate that interwar governments were constrained in their actions by past investments aimed at developing their fiscal systems, and not just Gold Standard membership. They also support the hypothesis that institutionallybased borrowing constraints can play an important role in fiscal policy procyclicality.

Esteves and Bent

Rui Pedro Esteves (University of Oxford, Department of Economics) Peter Bent (University of Massachusetts Amherst, Department of Economics)

What attracts capital flows to particular sectors of emerging economies? We take this question to an early period of high international capital mobility, the “first era of globalization” at the turn of the last century. We use a newly compiled dataset of capital exports covering the period 1883-1913. The data covers 37 capital-importing countries (accounting for 80 percent of the world population in 1913) and are disaggregated by importing sector: governments, railroads, public utilities, financial institutions, raw materials, and other industries. We find that fundamental indicators of economic potential – such as population growth and primary sector production – were positively associated with capital inflows. But these factors do not explain all capital flow patterns. Overall, our findings suggest that private sector capital inflows were generally attracted by economic fundamentals, while other factors also played a role for capital flows to governments and particular private sector industries.

What attracts capital flows to particular sectors of emerging economies? We take this question to an early period of high international capital mobility, the “first era of globalization” at the turn of the last century. We use a newly compiled dataset of capital exports covering the period 1883-1913. The data covers 37 capital-importing countries (accounting for 80 percent of the world population in 1913) and are disaggregated by importing sector: governments, railroads, public utilities, financial institutions, raw materials, and other industries. We find that fundamental indicators of economic potential – such as population growth and primary sector production – were positively associated with capital inflows. But these factors do not explain all capital flow patterns. Overall, our findings suggest that private sector capital inflows were generally attracted by economic fundamentals, while other factors also played a role for capital flows to governments and particular private sector industries.

The Existence and Persistence of Liquidity Effects: Evidence from a Large-Scale Historical Natural Experiment

Nuno Palma, University of Manchester and CEPR

The discovery of mines of precious metals in Central and South America led to a massive exogenous monetary injection to Europe's money supply. I argue this episode can be helpful to identifying the causal effects of money in a macroeconomic setting. Using a panel of six European countries for the period 1531-1790, I find strong evidence in favor of non-neutrality of money for changes in real economic activity. The magnitudes are substantial and persist for a long time: an exogenous 10% increase in production of precious metals in America leads to a hump-shaped positive response of real GDP, peaking at an average increase of 1.3% four years later. The evidence suggests this is because prices responded to monetary injections only with considerable lags. Several exogeneity tests and robustness checks confirm the results.

The discovery of mines of precious metals in Central and South America led to a massive exogenous monetary injection to Europe's money supply. I argue this episode can be helpful to identifying the causal effects of money in a macroeconomic setting. Using a panel of six European countries for the period 1531-1790, I find strong evidence in favor of non-neutrality of money for changes in real economic activity. The magnitudes are substantial and persist for a long time: an exogenous 10% increase in production of precious metals in America leads to a hump-shaped positive response of real GDP, peaking at an average increase of 1.3% four years later. The evidence suggests this is because prices responded to monetary injections only with considerable lags. Several exogeneity tests and robustness checks confirm the results.

The Toll of Tariffs: Protectionism, Education and Fertility in Late 19th century France

Vincent Bignon, Banque de France and CEPR Cecilia García-Peñalosa, Aix-Marseille University and CESifo

The assumption that education and fertility are endogenous decisions that react to economic circumstances is a cornerstone of the unified growth theory that explains the transition to modern economic growth, yet evidence that such a mechanism was in operation before the 20th century is limited. This paper provides evidence of how protectionism reversed the education and fertility trends that were well under way in late 19th-century France. The Méline tariff, a tariff on cereals introduced in 1892, led to a substantial increase in agricultural wages, thus reducing the relative return to education. We use regional differences in the importance of cereal production in the local economy to estimate the impact of the tariff. Our findings indicate that the tariff reduced education and increased fertility. The magnitude of these effects was substantial, and in regions with large shares of employment in cereal production the tariff offset the time trend in birthrates...

The assumption that education and fertility are endogenous decisions that react to economic circumstances is a cornerstone of the unified growth theory that explains the transition to modern economic growth, yet evidence that such a mechanism was in operation before the 20th century is limited. This paper provides evidence of how protectionism reversed the education and fertility trends that were well under way in late 19th-century France. The Méline tariff, a tariff on cereals introduced in 1892, led to a substantial increase in agricultural wages, thus reducing the relative return to education. We use regional differences in the importance of cereal production in the local economy to estimate the impact of the tariff. Our findings indicate that the tariff reduced education and increased fertility. The magnitude of these effects was substantial, and in regions with large shares of employment in cereal production the tariff offset the time trend in birthrates for up to 13 years. We conclude that even in the 19th century, policies that changed the returns to the education of their offspring affected parents’ decisions about the quantity and quality of children.

2nd half

Was gold standard a good idea for southern European periphery? A comparison between Spain and Italy

Alba Roldan

This paper aims to provide new evidence to the study of the costs and benefits of adherence to a fixed exchange rate system. To overcome major crises, there is a need for the stimulus of expansionary monetary and fiscal policy, as well as a flexible exchange rate. Countries outside the gold standard used fluctuations in the exchange rate to cushion the impact of economic shocks. The countries of Europe’s southern periphery, such as Italy and Portugal, were unable to remain within the gold standard. The structural problems of their economies prevented them from bringing their money supply under control and keeping their exchange rate stable. This paper aims to study the impact of the different macroeconomic policy instruments on the Spanish and Italian economies during the classical gold standard analysing the dynamic relationship between macroeconomic variables. This study tests whether maintaining a flexible exchange rate, as well as the autonomous...

This paper aims to provide new evidence to the study of the costs and benefits of adherence to a fixed exchange rate system. To overcome major crises, there is a need for the stimulus of expansionary monetary and fiscal policy, as well as a flexible exchange rate. Countries outside the gold standard used fluctuations in the exchange rate to cushion the impact of economic shocks. The countries of Europe’s southern periphery, such as Italy and Portugal, were unable to remain within the gold standard. The structural problems of their economies prevented them from bringing their money supply under control and keeping their exchange rate stable. This paper aims to study the impact of the different macroeconomic policy instruments on the Spanish and Italian economies during the classical gold standard analysing the dynamic relationship between macroeconomic variables. This study tests whether maintaining a flexible exchange rate, as well as the autonomous exercise of macroeconomic policy could have dampened the impact of the fluctuations of the economic cycle experienced by Spain and Italy.

Fertility decline in Unified Growth Theory and in England and Wales

James Foreman-Peck and Peng Zhou, Cardiff University

Fertility measured by Crude Birth Rate fell in England and Wales from the 1870s to a low in 1930s, with a small recovery in the 1950s and 1960s, followed by further decline (Mitchell 1962 pp29-30). From 1871 to 1911 the ratio of the female population aged 15–44 to the total population increased so that without a fall in the ‘cohort fertility rate’ this age-structure change would have raised the Crude Birth Rate (CBR). Female first marriage age rose from 24.4 in 1870 to 25.8 in 1910 which, for given marital fertility, will have reduced births. With the eventual drop in fertility Britain was following a transition path that all modern economies have taken, but not simultaneously; France and the United States began the process before England and Wales. After 1830 or perhaps earlier a slightly rising age at marriage in France was accompanied by falling marital fertility (Weir 1984, 1994)....

Fertility measured by Crude Birth Rate fell in England and Wales from the 1870s to a low in 1930s, with a small recovery in the 1950s and 1960s, followed by further decline (Mitchell 1962 pp29-30). From 1871 to 1911 the ratio of the female population aged 15–44 to the total population increased so that without a fall in the ‘cohort fertility rate’ this age-structure change would have raised the Crude Birth Rate (CBR). Female first marriage age rose from 24.4 in 1870 to 25.8 in 1910 which, for given marital fertility, will have reduced births. With the eventual drop in fertility Britain was following a transition path that all modern economies have taken, but not simultaneously; France and the United States began the process before England and Wales. After 1830 or perhaps earlier a slightly rising age at marriage in France was accompanied by falling marital fertility (Weir 1984, 1994). In contrast, only after 1900 did sustained fertility decline begin in much of Bavaria (Brown and Guinnane 2002). Beyond Western Europe, birth rates in the US were declining from the beginning of the nineteenth century (Haines 1996). This paper aims to follow Unified Growth Theory (UGT) (Galor and Weil 2000) in developing an explanation and a model that encapsulates both the Industrial Revolution break out and the fertility reduction with sustained economic growth. A central issue in understanding the decline of fertility is the identification problem; the challenge of understanding the role of one change when many other important forces altered at the same time (Guinnane 2011). Econometric studies of British fertility emphasise the importance of the rise in cost of female time that closely follows women’s education (and implicitly, wages) and the rise in child costs (Crafts 1984, Tzannatos and Symons 1989). But their conclusions are hard to square with the fall in British female labour force participation (Matthews et al 1982 pp. 563–65). The present exercise, using DSGE modelling, therefore differs from previous attempts in the more precise identification and measurement of contributory factors.

The Synchronization of US Regional Business Cycles: Evidence from Retail Sales, 1919–62

Jérémie Cohen-Setton and Egor Gornostay

Despite its central importance in the optimal currency area literature, little is known about when and why US regional business cycles became more synchronized. We shed light on these issues by (re)constructing a monthly index of retail sales for the 12 US Federal Reserve districts from 1919 to 1962, which for the first time allows the study of the synchronization of US regional cycles before and after the major reforms associated with the New Deal and World War II. We find that synchronization increased substantially in the 1930s and has since remained high. We argue that changes in regional industry structures and migration rates across regions cannot account for the increase in synchronization. In contrast, we find a strong relationship with changes in regional financial fragmentation and with the increase in interregional fiscal transfers.

Despite its central importance in the optimal currency area literature, little is known about when and why US regional business cycles became more synchronized. We shed light on these issues by (re)constructing a monthly index of retail sales for the 12 US Federal Reserve districts from 1919 to 1962, which for the first time allows the study of the synchronization of US regional cycles before and after the major reforms associated with the New Deal and World War II. We find that synchronization increased substantially in the 1930s and has since remained high. We argue that changes in regional industry structures and migration rates across regions cannot account for the increase in synchronization. In contrast, we find a strong relationship with changes in regional financial fragmentation and with the increase in interregional fiscal transfers.