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CEP discussion paper
Reparations, Deficits, and Debt Default: the Great Depression in Germany
Albrecht Ritschl
June 2012
Paper No' CEPDP1149:
Full Paper (pdf)

JEL Classification: N12; N13; E37; E47

Tags: great depression; germany; sudden stop; transfer problem; vector autoregressions

Germany’s Great Depression of the early 1930s started in 1929 with a sudden stop in the current account. It ended after a foreign debt default that unfolded in several stages from 1931 to 1933. This chapter reviews Germany’s macroeconomic history between the gold-based stabilisation of 1924 and the transition to autarky and domestic credit expansion in 1933. During the Dawes Plan of 1924-29, German borrowed abroad massively to pay reparations out of credit, a phenomenon that gave rise to the debate about the transfer problem between Keynes and his critics. An incentive based interpretation of the transfer problem is sketched to explain the later current account reversal. Time-varying VARs are employed to trace the propagation of the resulting macroeconomic shock, and to obtain estimates of fiscal multipliers.