Were Capital Flows the Culprit in the Weimar Economic Crisis?

This paper examines the role of capital flows in the interwar German economy. We use a calibrated model of sudden stops as our analytical framework and derive four key findings. First, capital flows aggravated the boom--bust cycle of the Weimar economy. Second, these flows were strongly associated---during different periods---with reparations, conditions in the US capital market, and German domestic events. Third, capital flows before 1930 allowed Germany to pay reparations on credit and thus postponed the hour of reckoning when that debt had to be serviced using trade surpluses. Fourth, the German economic downturn in 1931 was due more to capital flows than to productivity shocks or reparations.