Germany in an Interconnected World Economy EDITOR Ashoka Mody INTERNATIONAL MONETARY FUND ©International Monetary Fund. Not for Redistribution © 2013 International Monetary Fund Cataloging-in-Publication Data Joint Bank-Fund Library Germany in an interconnected world economy / editor, Ashoka Mody. – Washington, D.C. : International Monetary Fund, 2013. p. : ill. ; cm. Includes bibliographical references. 1. Germany – Economic conditions. 2. Economic development – Germany. 3. Germany – Foreign economic relations. 4. Financial crises – Germany. 5. Labor market – Germany. I.Mody, Ashoka. II. International Monetary Fund. HC286.G47 2013 Disclaimer: The views in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members. ISBN: 978-1-61635-424-4 (paper) ISBN: 978-1-47558-239-0 (ePub) ISBN: 978-1-47552-249-5 (Mobipocket) ISBN: 978-1-47551-671-5 (Web PDF) Please send orders to: International Monetary Fund, Publication Services P.O. Box 92780, Washington, D.C. 20090, U.S.A. Tel: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] Internet: www.imfbookstore.org ©International Monetary Fund. Not for Redistribution Contents Foreword v Christian Kastrop Preface ix Ashoka Mody 1 Tests of German Resilience .....................................................................1 Fabian Bornhorst and Ashoka Mody The Postwar Catch-Up ..........................................................................................................3 The Slowdown .........................................................................................................................5 Reemergence ...........................................................................................................................9 The Great Recession............................................................................................................19 References ..............................................................................................................................32 2 The Crisis’s Impact on Potential Growth in Germany: The Nature of the Shock Matters ......................................................... 35 Martin Schindler Introduction ...........................................................................................................................35 Background: Concepts and Related Literature .........................................................38 Methodology and Results ................................................................................................41 Germany’s Growth Sources through a Growth Accounting Lens...................................................................................................................47 Conclusion ..............................................................................................................................50 References ..............................................................................................................................51 Appendix ................................................................................................................................52 3 German Productivity Growth: An Industry Perspective ................. 55 Hélène Poirson Introduction ...........................................................................................................................55 German and United States Productivity: Stylized Facts ........................................60 An Industry Perspective ....................................................................................................64 Conclusion ..............................................................................................................................72 References ..............................................................................................................................73 Appendix ................................................................................................................................76 4 What Does the Crisis Tell Us about the German Labor Market? ..... 77 Martin Schindler Introduction ...........................................................................................................................77 Background ............................................................................................................................78 Recent Developments ........................................................................................................80 Understanding German Labor Market Dynamics ....................................................85 Conclusion ..............................................................................................................................92 References ..............................................................................................................................94 Appendix ...............................................................................................................................96 iii ©International Monetary Fund. Not for Redistribution iv Contents 5 Growth Spillover Dynamics: From Crisis to Recovery .................... 97 Hélène Poirson and Sebastian Weber Introduction ...........................................................................................................................97 Growth Linkages and Spillovers: Related Literature .............................................100 Empirical Approach ...........................................................................................................105 Results ....................................................................................................................................109 Channels of Growth Spillover Transmission ............................................................123 Conclusion ............................................................................................................................130 References ............................................................................................................................131 Appendix ..............................................................................................................................133 6 Do Fiscal Spillovers Matter? ................................................................149 Anna Ivanova and Sebastian Weber Introduction .........................................................................................................................149 Literature ...............................................................................................................................151 Framework............................................................................................................................155 Simulation Results .............................................................................................................158 Conclusion ............................................................................................................................186 References ............................................................................................................................187 Appendix ..............................................................................................................................189 7 Current Account Imbalances: Can Structural Policies Make a Difference? ...............................................................................199 Anna Ivanova Introduction .........................................................................................................................199 Literature Review ...............................................................................................................202 Baseline Model....................................................................................................................205 Structural Policies and the Current Account ...........................................................208 Long-Standing Structural Differences and the Current Account .....................212 Interaction of Structural Factors and Fundamentals ............................................215 Implications for Germany ...............................................................................................217 Conclusion ............................................................................................................................220 References ............................................................................................................................221 Appendix ..............................................................................................................................223 8 Discussion ..............................................................................................239 Comment on Chapters 2 and 3 ....................................................................................239 Malte Hübner Comment on Chapter 4 ...................................................................................................242 Werner Eichhorst Comment on Chapter 5 ...................................................................................................247 Felix Hüfner Comment on Chapter 7 ...................................................................................................252 Carsten-Patrick Meier References ............................................................................................................................256