Academic journal article Atlantic Economic Journal

Is There a German View on Stabilization Policy Issues?

Academic journal article Atlantic Economic Journal

Is There a German View on Stabilization Policy Issues?

Article excerpt

According to Paul Krugman [2003] there is an ideology-driven conservative German view on stabilization policies, which stands in contrast to the more pragmatic approach of Anglo-Saxon academics and policy makers. Krugman holds this view responsible for contributing to the increase in unemployment rates in Europe via overly cautious monetary and fiscal policies.

The Krugman hypothesis implies two questions: First, is there really a bias of German economists against the use of stabilization policies? Second, if such a view can be detected, to what extent can it be blamed for the European unemployment problem?

According to the former head of the German Council of Economic Experts (Sachverstaendigenrat--SVR), Juergen B. Donges [IWH, 9/2002], there have been three principles for German economic policy advisors over the last 30 years. First, regarding growth and labor market policies, the Keynesian demand management approach was abandoned in 1974 in favor of a strict neo-classical supply-side paradigm. Although there is a consensus in macroeconomics that Say's law (supply creates its own demand) does not hold [Blanchard, QJE, 2000], this law represents the core belief of the SVR: "With the slogan 'supply creates its own demand' ... we enraged the bigger part of our profession. This was not to our discontent, for the turmoil was necessary if the heads should be cleansed. …

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