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What ever happened to Germany? Is the decline of the former European key currency country caused by structural sclerosis or macroeconomic mismanagement?

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Author Info
Eckhard Hein () (WSI, Hands-Boeckler-Stiftung, Düsseldorf)
Achim Truger () (WSI, Hands-Boeckler-Stiftung, Düsseldorf)

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Abstract

This paper challenges the institutional sclerosis view of the German crisis according to which rigid labour markets and generous welfare state institutions have driven Germany into its position as "Europe's sick man". In general, the view is not convincing, because the underlying hypotheses about the effects of labour market regulation and welfare state institutions on employment and growth cannot unambiguously be derived from modern labour market theory and are at least partially at odds with accepted empirical findings. In particular, the explanation is unconvincing, because in international comparison Germany's labour market and welfare state institutions are simply not as sclerotic as often supposed. In most of the aggregate indicators for structural rigidities Germany is not worse than the average OECD or EU country. Moreover, there is a macroeconomic explanation focusing on the combined effects of restrictive and pro-cyclical monetary, fiscal and wage policies in Germany that is broadly consistent with modern macroeconomic theory and is supported by empirical data.

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Publisher Info
Paper provided by Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology) in its series Darmstadt Discussion Papers in Economics with number 134.

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Length: 40 pages
Date of creation: Aug 2004
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Handle: RePEc:tud:ddpiec:134

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  1. Belot, M.V.K. & Ours, J.C. van, 2001. "Unemployment and labor market institutions : an empirical analysis," Discussion Paper 50, Tilburg University, Center for Economic Research. [Downloadable!]
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  2. Philip Arestis & Malcolm Sawyer, 2005. "Aggregate demand, conflict and capacity in the inflationary process," Cambridge Journal of Economics, Oxford University Press, vol. 29(6), pages 959-974, November. [Downloadable!] (restricted)
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  3. Dean Baker & Andrew Glyn & David Howell & John Schmitt, 2002. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," SCEPA Working Papers 2002-17, Schwartz Center for Economic Policy Analysis (SCEPA), The New School. [Downloadable!]
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  4. Ronald Schettkat, 2003. "Institutions in the Economic Fitness Landscape: What Impact Do Welfare State Institutions Have on Economic Performance?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 1(2), pages 27-33, October. [Downloadable!]
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  7. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
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  8. Schettkat, Ronald, 2003. "Institutions in the Economic Fitness Landscape: What Impact Do Welfare State Institutions Have on Economic Performance?," IZA Discussion Papers 696, Institute for the Study of Labor (IZA). [Downloadable!]
  9. Solow, Robert M, 2000. "Unemployment in the United States and in Europe - A Contrast and the Reasons," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  10. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  11. Stephen G. Cecchetti, 1995. "Distinguishing theories of the monetary transmission mechanism," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-97. [Downloadable!]
  12. Engelbert Stockhammer, 2004. "Explaining European Unemployment: Testing the NAIRU Hypothesis and a Keynesian Approach," International Review of Applied Economics, Taylor and Francis Journals, vol. 18(1), pages 1-26, January. [Downloadable!] (restricted)
  13. Blanchard, Olivier & Katz, Lawrence F, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter. [Downloadable!] (restricted)
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  14. Siebert, Horst, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer. [Downloadable!] (restricted)
  15. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March. [Downloadable!] (restricted)
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  16. Nickell, Stephen, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer. [Downloadable!] (restricted)
  17. Giuseppe Bertola & Francine D. Blau & Lawrence M. Kahn, 2001. "Comparative Analysis of Labor Market Outcomes: Lessons for the US from International Long-Run Evidence," NBER Working Papers 8526, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Ronald Schettkat, 2003. "Are institutional rigidities at the root of European unemployment?," Cambridge Journal of Economics, Oxford University Press, vol. 27(6), pages 771-787, November.
  19. Allsopp, Christopher & Vines, David, 1998. "The Assessment: Macroeconomic Policy after EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 1-23, Autumn.
  20. Arestis, Philip, 1996. "Post-Keynesian Economics: Towards Coherence," Cambridge Journal of Economics, Oxford University Press, vol. 20(1), pages 111-35, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eckhard Hein & Thorsten Schulten, 2004. "Unemployment, wages and collective bargaining in the European Union," Macroeconomics 0412006, EconWPA. [Downloadable!]
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