European Economy. Economic Papers. Germany's growth performance in the 1990's

Table 2A.2: German Fiscal Shock (Standard QUEST wage equation)
91
92
93
94
95
96
97
98
99
00
GDP
0.54
0.77
0.39
-0.30
-0.78
-1.34
-1.99
-2.45
-2.87
-3.05
Private Consumption
-0.61
-0.44
-0.65
-1.13
-1.44
-1.82
-2.26
-2.60
-2.88
-2.93
Private Investment
2.39
0.95
-1.28
-2.75
-3.95
-4.69
-4.62
-4.11
-3.34
-2.66
Employment
0.03
-0.18
-0.57
-1.06
-1.48
-1.80
-2.15
-2.51
-2.88
-3.21
Rear wage costs
0.54
1.46
1.60
1.39
1.12
0.74
0.42
0.29
0.21
0.23
Real net wages
0.53
0.19
-1.26
-3.04
-4.27
-5.57
-6.93
-8.1
-9.10
-9.58
CPI
0.15
0.55
0.96
1.18
1.39
1.67
1.99
2.26
2.62
3.04
Capital stock
0.09
0.19
0.15
-0.01
-0.24
-0.53
-0.81
-1.05
-1.23
-1.34
Labour productivity
0.55
0.96
0.89
0.60
0.49
0.17
-0.21
-0.38
-0.50
-0.39
Inflation
0.15
0.40
0.40
0.22
0.21
0.27
0.32
0.26
0.36
0.41
Unemployment rate
-0.03
0.17
0.53
0.99
1.39
1.68
2.01
2.34
2.69
2.99
Trade balance (% of GDP)
0.31
-0.64
-0.76
-0.70
-0.63
-0.48
-0.20
0.07
0.35
0.54
Results are % deviations from baseline levels.
An important feature of these results is the strong negative labour market response to the
German fiscal shock. To a large part, this can be attributed to the increase in both the effective
labour and indirect taxes in Germany. Both in order to separate the effect from the first and the
second channel on output growth and to show the sensitivity of the results to alternative
assumptions on the employment elasticity of taxation, Table 2A.3 contains results, where it is
assumed that unemployment and other social benefits are fully indexed to the net wage. In this
scenario labour taxes are less distortionary. As can be seen the negative employment effect is
much smaller and consequently the long run effects of fiscal policy turn out to be less severe.
Nevertheless, even in this scenario, a two year increase in the growth rate is followed by a
period of slower growth until 1999.