Abstract
AbstractThis paper provides insights into the time‐varying dynamics of the German business cycle over the last five decades. To do so, I employ an open‐economy time‐varying parameter VAR with stochastic volatility, which I estimate by quasi‐Bayesian techniques. The reduced‐form analysis reveals substantial shifts in the variables’ long‐run growth rates and shock volatilities over time. German trend inflation has strongly decreased and settled at a historically low level. GDP growth volatility exhibits marked fluctuations over time and has dropped to historically low levels only after the global financial crisis. The structural analysis employs externally identified oil supply shocks along with a recursive identification scheme to identify key macroeconomic shocks. The analysis reveals strong fluctuations in both the impact responses of macroeconomic aggregates to these shocks and the shock propagation processes. Thus, I conclude that business cycle stabilization in Germany is driven by both good policy and good luck.
Highlights
During the last five decades, the German economy was subject to enormous structural changes
To investigate how the structural and institutional changes affected the German economy since the early 1970s, I employ an open-economy TVP-SV-VAR and estimate it using the quasi-Bayesian local likelihood (QBLL) methodology introduced by Petrova (2019)
This paper provides a comprehensive view on this issue by means of a timevarying parameter VAR with stochastic volatility
Summary
During the last five decades, the German economy was subject to enormous structural changes. I jointly model domestic forces along with a global activity proxy using a time-varying parameter VAR with stochastic volatility (TVP-SVVAR), which I estimate using quasi-Bayesian methods. I find a strong reduction in business cycle volatility, which appears to be rather gradual than discrete The latter can be traced back to strong drops in the magnitude of reduced-form shocks hitting inflation, wage growth, and the exchange rate change. This paper contributes to the literature on structural change in the German economy, regarding the decline in business cycle volatility.
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