Financial Development and Sectoral Output Growth in 19th Century Germany

CESifo Working Paper No. 3283

Financial Development and Sectoral Output
Growth in 19^th Century Germany

Abstract

In this paper we re-evaluate the hypothesis that the development of the financial sector was an
essential factor behind economic growth in 19^th century Germany. We apply a structural VAR
framework to a new annual data set from 1870 to 1912 that was initially recorded by Walther
Hoffmann (1965). With respect to the literature, the distinguishing characteristic of our
analysis is the focus on different sectors in the economy and the interpretation of the findings
in the context of a two-sector growth model. We find that all sectors were affected
significantly by shocks from the banking system. Interestingly, this link is the strongest in
sectors with small, non-tradable goods producing firms, such as services, transportation and
agriculture. In this regard, the growth patterns in 19th century Germany are reminiscent to
those in today's emerging markets.

JEL-Code: C22, N13, N23, O11.

Keywords: economic growth, financial development, sectoral asymmetries.

December 2010

We would like to thank Jeremy Edwards, Sheilagh Ogilvie, Aaron Tornell and the
participants of the European Economic Association 2010 in Glasgow and Verein für
Socialpolitik 2010 in Kiel, for helpful comments and suggestions.

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