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Fiscal Policy in the Federal Republic of Germany

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  • Franz, Wolfgang

Abstract

The main purpose of this paper is at least twofold. Firstly, the paper gives a record of fiscal policy in the Federal Republic of Germany by describing various phases of its design during the past twenty years. This is done on the background of changing economic conditions and different monetary regimes. As a second purpose, the paper attempts to evaluate the performance of fiscal policy in the Federal Republic of Germany both by taking stock of some empirical results obtained in other studies and by own econometric investigations. The goal of the econometric analysis is to estimate fiscal and monetary policy rules by taking into account explicitly the possibility that these policies have to be treated as at least partly endogenous variables. As a major outcome of the first purpose, three phases of fiscal policy may be distinguished. While the first phase is characterized by a short-term oriented global demand management prevailing until the mid-seventies, fiscal policy was more in favor of a steadily oriented growth and structural policy afterwards. This phase was succeeded by an embarkment upon a cause of fiscal consolidation since the beginnings of the eighties. With respect to the effectiveness of fiscal policy actions, our own econometric analysis is based on a four equations model. Basically it consists of a conventional IS-LM model with a very simple Phillips curve. In addition, fiscal and monetary reaction functions are estimated in order to avoid biased coefficients associated with the impact of fiscal and monetary impulses on employment. It is shown, how important it is (econometrically) to treat policies as endogenous variables. Moreover, our results point to the well-known experience that only a combination of expansive fiscal and monetary measures is suitable to fight against unemployment.
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Suggested Citation

  • Franz, Wolfgang, 1990. "Fiscal Policy in the Federal Republic of Germany," Empirical Economics, Springer, vol. 15(1), pages 17-54.
    • Handle: RePEc:spr:empeco:v:15:y:1990:i:1:p:17-54
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean, 1990. "Why does money affect output? A survey," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 15, pages 779-835, Elsevier.
    2. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-127, March.
    3. Stanley Fischer, 1987. "Monetary Policy and Performance in the U.S., Japan and Europe, 1973-86," NBER Working Papers 2475, National Bureau of Economic Research, Inc.
    4. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    5. Michael J. Boskin, 1987. "Concepts and Measures of Federal Deficits and Debt and Their Impact on Economic Activity," NBER Working Papers 2332, National Bureau of Economic Research, Inc.
    6. Stanley Fischer, 1987. "Monetary Policy and Performance in the U. S. , Japan and Europe, 1973-86," Working papers 462, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Boskin, Michael J., 1987. "Concepts and Measures of Federal Deficits and Debt and their Impact on Economic Activity," CEPR Publications 244437, Stanford University, Center for Economic Policy Research.
    8. Barro, Robert J, 1986. "Recent Developments in the Theory of Rules versus Discretion," Economic Journal, Royal Economic Society, vol. 96(380a), pages 23-37, Supplemen.
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    Cited by:

    1. Franz, Wolfgang, 1991. "International migratory movements: The German experience," Discussion Papers, Series II 160, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    2. Franz, Wolfgang & Oser, Ursula & Winker, Peter, 1993. "Migratory movements in a disequilibrium macroeconometric model for West Germany," Discussion Papers, Series II 202, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    3. Einar Bowitz & Stein Inge Hove, 1996. "Business cycles and fiscal policy: Norway 1973-93," Discussion Papers 178, Statistics Norway, Research Department.

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