Macroeconomic policies, wage developments, and Germany's stagnation

Eckhard Hein and Achim Truger

No 01-2005, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: The paper fundamentally challenges the institutional sclerosis explanation of the present German economic stagnation. Instead we present a macroeconomic explanation focusing on the combined effects of too restrictive monetary policies, too restrictive and sometimes pro-cyclical fiscal policies and overly moderate wage policies in Germany since the mid 1990s. This view is broadly consistent with modern macroeconomics and with empirical data. From this perspective we finally argue that Germany urgently needs more expansive fiscal and monetary policies in the short run, and that in the medium run the conditions for nominal wage growth in Germany according to the sum of long run national productivity growth and the ECB's inflation target have to be improved. Further pursuing a policy of structural reforms with respect to the labour market and the social benefit system in combination with a restrictive macroeconomic policy mix, however, will prolong Germany's economic stagnation and will considerably increase the risk of deflation.

Keywords: monetary policy; fiscal policy; structural reform (search for similar items in EconPapers)
JEL-codes: E63 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2005-04
New Economics Papers: this item is included in nep-mac
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Working Paper: Macroeconomic policies, wage developments, and Germany’s stagnation (2005)
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