Capital Markets and Grain Prices : Assessing the Storage Approach

This paper evaluates an approach popularized by McCloskey and Nash (1984) that exploits the fact that grain prices provide information on interest rates. While the grain price approach enables a comparative analysis of capital market development across pre-modern economies and has been applied in various contexts, to date this is the first paper to show how well it captures the actual market development as based on financial data. Using matched data on bank interest rates and grain prices for early 19th century U.S. regions, we show that the grain price approach is useful for capturing differences in capital market development across regions. While estimating particular region-time specific interest rates can be challenging, using both cross-sectional and time-series information the grain price approach accurately reflects differences in capital market development. Furthermore, the approach is robust to employing time series filtering techniques as well as dealing with unavailable information on harvest times, outliers, and a range of other factors