UCLA

This dissertation contributes to our understanding of commodity markets, financial markets, and production during wartime.

Chapter 1 provides a short introduction to multiple channels through which wars affected an economy studied in Chapter 2 to Chapter 4.

Chapter 2 investigates how financial integration impacts price integration in real sectors? Using hand-collected data from a domestic exchange market during the Chinese Civil War (1945-1949), I model the connection between these two integrations measured respectively by capital flow costs (or domestic exchange rates) and relative commodity prices across cities. I use battle shocks to a financial hub in the exchange network to identify the impact of exchange rates on price convergence between a city pair connected to the hub. I find that (1) city pairs with a direct domestic exchange link exhibited faster commodity price convergence than others; (2) battles around financial hubs tended to raise capital flow costs between a connected city pair, decelerating price convergence by 4% - 8%; (3) a weak form of purchasing power parity holds: a 1% depreciation in the domestic exchange rates was associated with a 0.2-0.3 percentage point reduction in inflation rate differentials; and (4) a higher inflation rate did not impede or strengthen the price convergence channel via domestic exchanges. These results imply that China's financial development was more sophisticated than expected relative to its status as an agricultural economy in the early 20th century.

Chapter 3 studies how bond traders' extreme beliefs of repayments led to bond market anomalies. The conventional valuation model states that the value of a bond is the sum of the present values of its future cash flows. However, the prices of the consolidated government bonds soared up to thousands of times their face values from 1946 to 1948 during the Chinese Civil War. I find that (1) the bond prices anchored the Shanghai wholesale price index amid hyperinflation; (2) the extreme price pattern was primarily explained by the bond traders’ evolving belief that the government would repay the bonds with an appropriate multiplier after implementing the Currency Reform; (3) the belief was significantly affected by relevant news about repayment. On a weekly average basis, one more positive news about the Currency Reform will lead to an 8.8 percentage points increase in bond price growth rate, while one additional negative news about the repayment with multipliers will decelerate the growth rate by 8.2 percentage points; and (4) at least before the eve of the Currency Reform, the Shanghai financial markets were not sensitive to political uncertainties resulting from the Civil War.

Chapter 4 builds a two-layer supply chain framework in a static centralized economy to investigate the propagation of a productivity shock across sectors. I show that a productivity shock can be transmitted downstream (from an intermediate goods sector to a final goods sector), upstream, or horizontally (from a final goods sector to another sector). A negative shock incurred by a sector may hurt another sector if they are linked directly, but will always stimulate the production in an indirectly linked sector. Using detailed bombing data and production indices across armament sectors during the Second World War, this chapter investigates whether a shock caused by the Allies' strategic bombing towards Nazi Germany propagated through the production network. The empirical results fit the theoretical model well.