Financial Development and Sectoral Output Growth in 19th Century Germany



4 A sectoral analysis

Figure 3: Impulse Responses for Net Domestic Product and Bank Lending, and Investment and Bank
Lending

Panel A

Panel B

Note: The solid lines trace the impulse responses of net domestic product
(NDP) and investment (I) to shocks in bank lending (B) for the years 1870
to 1912.

Table 4: Variance Decomposition for Net Domestic Product and Bank Lending, and Investment and
Bank Lending

Years

Variance Decomposition                5        10

NDP variance due to B (in percent) 20.777    21.045

[10.648]    [11.186]

I variance due to B (in percent)        25.256    25.690

_____________________________________________[12.860]    [13.955]
Note: The variance decomposition of the forecast error is
shown for the three-variable VAR, including net domestic
product (NDP), investment (I) and bank lending (B) for the
years 1870 to 1912. The values in parentheses indicate the
standard deviation.

4 A sectoral analysis

The findings in the previous sections largely confirmed earlier research on historical data in
Germany and other countries. A key question that we would like to address in the present
paper, is to understand which sectors of the economy benefited most strongly from the pos-
itive link between bank lending and growth. In the literature on today’s emerging markets,
pronounced sectoral asymmetries are often found, and we find it very interesting to compare
how the growth process in 19
th century Germany relates to the experiences of the emerging
markets of the last 20 to 30 years. We therefore also investigate the sectoral differences in the
responses of output to aggregate lending in this section.

In the literature on financial development in emerging markets, sectors are typically classi-
fied as small (and non-tradable) or large (and tradable). The motivation for this classification

10



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