Great Expectations? Germany's Recovery from the Great Depression, 1932-1936

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In modern macroeconomics, expectations play the lead role in the economic drama. This revolution in economic thinking has important implications for economic history: if we are to understand the course of events in key moments of macroeconomic history such as the Great Depression, economic historians must study the expectations of contemporary economic agents. Recent scholarship on the Great Depression has consequently put strong emphasis on the role of expectations. Eggertssons (2008) study of the Great Depression in the U.S. is a prominent example how to combine macroeconomic modeling with its emphasis on expectations and macroeconomic history. Our research project proposes to take up these insights across the Atlantic and study the role of expectations for the recovery of the German economy from the Great Depression. By some measures, the German economic recovery under Hitler was faster and more complete than the American one under Roosevelt. If a credible regime change that altered the inflation expectations of economic actors prompted the U.S. recovery, what made the German economy turn the corner after 1932? Did the Nazis engineer a comparable shift in the policy regime that helped escape from the contractionary deflation trap, or, if not, what other mechanisms were at work?The overarching objective of the proposed project is to describe and analyse the changes of expectations about key economic variables in Germany from 1932-1934 and evaluate their importance for the recovery in a structural macroeconomic model. We aim to assemble qualitative and quantitative evidence about the evolution of expectations from company archives and other sources and relate them to the cyclical profile of the recovery. The project consists of three parts. The objective of the first part is to provide a detailed descriptive analysis of the German economy from 1925 to 1935 on a monthly frequency. For this purpose, we will digitize a few hundred detailed sector-level time series on output, wages, and prices from the Konjunkturstatistisches Handbuch of 1936 and analyse them econometrically. The second part of the project focuses on the expectation formation of economic agents in Germany in the years 1932-34. Our aim is to extract detailed expectations on the micro-level from company archives as well as macroeconomic expectations from financial markets, the financial press, and forecasts of research institutes, banks and business associations. This part forms the historical core of the research project. In the third part of the project, we will use the evidence to evaluate what role changing expectations played for the German recovery in the 1930s. We will develop a structural dynamic macroeconomic model that integrates various explanations for the German recovery. We will calibrate the model to the data and quantify the relative importance of expectation changes in accounting for the German recovery from 1932-1934.