The great recession: A crisis in parameters?

Abstract

Beginning with the first oil crisis, the economic development in West Germany and most other industrialized countries is no longer what it used to be: growth rates sharply diminished, unemployment became a burning problem and inflation-rates did hardly respond to the slackening demand. But it came even worse: what in the mid-seventies had been called stagflation turned into a severe recession in the eighties. And even if the picture improves in the near future, the mid-term and long-term prospects are in no way very promising. As usual, it took some time until the crisis and its severity was widely recognized. But while there is some consensus as to the statistical diagnesis, there is still a wide range of opinions as to the origins (and to the therapy) of the crisis. With the risk of simplifying too much, in Germany (and elsewhere) two extreme views can be separated: one view which attributes the current problems to the growing inflexibility of the system, at least partly caused by too many direct and indirect government activities; he other view, which does not see the origin of the difficulties in changing behaviour of the economic agents which the first view tends to emphasize, but in dramatic changes of some exogenous variables, such as the various supply and demand shocks of the seventies.

The present paper examines the empirical evidence of the first view for the FRG. It tests whether there were parameter shifts during the seventies which were of such a magnitude that they can explain the bad economic performance of the last ten years. The paper is organized as follows: Section 1 presents the hypotheses to be tested, section 2 describes the data and methods used, section 3 analyses the results obtained. The paper is closed by a résumé.