Output, Political Uncertainty, and Stock Market Fluctuations: Germany, 1890 - 1940
Center for Economic Studies Working Paper at University of Munich No. 87
Posted: 25 Jul 1998
Date Written: September 1995
The sources of stock volatility and especially higher volatility in recessions have puzzled financial economists. One explanation emerges from recent theoretical work that points to political and regulatory uncertainty as a source of output fluctuations. Since political uncertainty can also generate stock price volatility, its joint effects on stock prices and output may explain why stock volatility is correlated with output declines. Evidence from a particularly instructive natural experiment, the transition from Imperial to Weimar Germany, supports the view that stock price volatility reflects an uncertain political climate. Statistically, stock price volatility and the ultimate factors it represents play a major role in explaining the post-World-War-I collapse of the German economy and subsequent output fluctuations. A doubling of stock volatility implies a decline of output of -6 to -15 percent.
JEL Classification: E3, G1
Suggested Citation: Suggested Citation