Table of Contents 0.
Executive summary................................................................................................... 1
1.
Growth of the German economy in the 1990s: stylised facts ................................... 6
1.1 After the re-unification boom: Germany’s business cycles in the 1990s ............. 6
1.1.1 Output growth ................................................................................................. 6
1.1.2 The recovery of 1995/98................................................................................. 6
1.1.3 The recovery of 1999/2001............................................................................. 9
1.1.4 An econometric analysis of the short-term response of growth to exports .. 11
1.1.5 The dependence of the business cycle on trade ............................................ 13
1.1.6 Conclusions................................................................................................... 14
1.2 The growth performance in the 1990s in a longer-term perspective .................. 15
1.2.1 Output and employment growth ................................................................... 15
1.2.2 Population growth......................................................................................... 15
Box 1: The economic performance of the New Länder....................................... 17
B1.1 Output growth and production structure .................................................. 17
B1.2 Competitiveness and the labour market ................................................... 19
1.2.3 Labour market developments........................................................................ 22
1.2.4 Labour input and labour productivity ........................................................... 23
1.2.5 Growth accounting........................................................................................ 24
1.2.6 Demand components of output growth......................................................... 26
1.2.7 Conclusions................................................................................................... 29
Box 2: Developments in the German construction sector ................................... 30
B2.1 Large differences between West and East Germany................................ 30
B2.2 Residential construction ........................................................................... 30
2.
The macro-economic policy mix ............................................................................ 32
2.1 Monetary policy in the 1990s ............................................................................. 32
2.1.1 Developments in the 1990s........................................................................... 32
2.1.2 Measuring monetary policy .......................................................................... 34
2.1.3 Assessment.................................................................................................... 36
2.2 Budgetary policy in Germany in the 1990s ........................................................ 38
2.2.1 Immediate impact of re-unification .............................................................. 38
2.2.2 Composition of revenues .............................................................................. 39
2.2.3 Composition of expenditure.......................................................................... 40
2.2.4 The year 1996 as a turning point?................................................................. 41
2.2.5 Conclusions................................................................................................... 42
Box 3: Economic policies in the new Länder ..................................................... 43
B3.1 The size of fiscal transfers........................................................................ 43
B3.2 The efficiency of regional policy ............................................................. 44
2.2.A Annex: The effects of German fiscal policy in the 1990s: .......................... 50
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3.
Structural issues ...................................................................................................... 52
3.1 Competitiveness, trade and FDI.......................................................................... 52
3.1.1 Development of competitiveness indicators in the 1990s............................. 52
3.1.2 Trade developments ...................................................................................... 57
3.1.3 Developments of foreign direct investment.................................................. 64
Box 4: FDI as an indicator for Germany’s attractiveness as a business location 71
B4.1 Different FDI definitions in the 1990s ..................................................... 71
B4.2 Statistical discrepancies might distort analysis ........................................ 71
3.1.4 Some concluding remarks............................................................................. 72
3.1.A Annex: The real exchange rate and economic performance in Germany .... 74
3.2 The functioning of the labour market ................................................................. 75
3.2.1 Overview....................................................................................................... 75
3.2.2 Wage formation: how flexible can it be?...................................................... 79
3.2.3 Labour demand: Does job creation pay? ...................................................... 83
3.2.4 Labour supply: Does work pay? ................................................................... 87
3.2.5 Concluding remarks ...................................................................................... 89
3.2.A Annex: Simulation of Germany's potential growth rate .............................. 92
3.3 Product markets: Obstacles to growth in individual markets ............................. 93
3.3.1 Network industries ........................................................................................ 93
3.3.2 Inefficiencies in spending public money ...................................................... 94
3.3.3 Capital markets ............................................................................................. 94
3.3.4 Restrictions to market access ........................................................................ 95
3.3.5 Conclusions................................................................................................... 96
References....................................................................................................................... 98
