Tuesday, November 22, 2011

If the Germans Were Serious About Stabilizing Aggregate Demand

Then they would be doing exactly what they are doing now, if their only concern were Germany.  Last week the Federal Statistics Office of Germany released third quarter nominal GDP data where we find relatively robust growth in aggregate demand:

This above-trend growth is entirely consistent with the reluctance of the Germans to open up the ECB monetary spigot.  Doing so would only serve to further raise aggregate demand above trend growth.  The Germans are probably concerned that the additional nominal spending stimulus would raise inflation uncomfortably high and create a positive output gap.  Maybe the Germans are hardcore nominal GDP targeters.  

But are the Germans really focusing on just their own aggregate demand growth?  It is a strange argument to make since the ongoing collapse in Eurozone aggregate demand (see figure below) will ultimately affect the German economy too.  Nonetheless, it is hard not to wonder these thoughts given the Eurozone seems to have been serving German interests all along and the recent reluctance of the Germans to meaningfully address the Eurozone crisis.  It is also not hard to think these thoughts when one comes across statements such as the rather cheery press release accompanying the third quarter GDP numbers (my bold):
Gross domestic product in 3rd quarter of 2011: upswing continues
WIESBADEN – The German economy continues its growth: In the third quarter of 2011, the gross domestic product (GDP) rose 0.5% – upon price, seasonal and calendar adjustment – on the second quarter. In addition, the result for the second quarter of 2011 has been corrected upwards to +0.3%, as reported by the Federal Statistical Office (Destatis). This means that, following the strong growth at the beginning of the year (+1.3% in the first quarter), the upswing of the German economy continued in the course of 2011, with the growth rate slightly increasing in the reference quarter compared with the previous quarter.
In a year-on-year comparison, too, the GDP grew strongly, although not as strongly as in the first half of the year: In the third quarter of 2011, the price-adjusted GDP was up 2.5% on a year earlier (calendar-adjusted: +2.6%).

And lest you think this is an isolated case, below is a recent AP story on consumer confidence in Germany:
BERLIN (AP) — A survey finds that consumer confidence in Germany, Europe's biggest economy, is holding up despite increasing worries about the economic outlook.  The GfK research institute said Tuesday that its forward-looking consumer confidence indicator for November stands at 5.3 points — up from 5.2 points in October.  GfK says that consumers "remain very optimistic" about income expectations and that their willingness to buy also is being helped by low unemployment and rising salaries.
Really?  German consumers remain very optimistic about income expectations and future spending despite the onward march to Eurogeddon?  Do they know something we do not know?  Or, are they so caught up in the relative successes of the German economy that they fail to fully appreciate what is happening in the rest of the Eurozone?  

In case there were any questions, what has happened to aggregate demand in the rest of the Eurozone can be seen below.  First, nominal spending has never recovered from its collapse in 2008 and 2009: 

Moreover, nominal spending has actually fallen over the past two quarters:

Now maybe the German public does appreciate what is going on in the Eurozone, but simply are not fazed by it.  One reason for this might be their belief that they can force the rest of the Eurozone to become more German-like as this "we have them by the balls" comment indicates.  A second reason is that in a worst-case scenario the Eurozone breaks up and they return to their beloved Deutsche Mark with a relatively resilient German economy.  Whatever the motivation may be, what we do know is that the Germans are doing a fine job stabilizing aggregate demand in Germany.  


  1. Is there any reason why Germany could not use fiscal policy to push down on nominal demand in Germany, rather than requiring monetary tightening?

    It is a curious asymmetry with e.g. the US or UK where politicians obsess about how best to use fiscal policy to boost demand.

  2. This post is - perhaps unintentionally - disingenuous, but it does illustrate one of the problems of NGDP targeting.

    I came to this post having read the one above, in which you argue that the US has a trend growth rate of 3% - ie a compound rate of growth. In this post, however, you present a linear trend, from which you conclude that German growth is above trend. I dare say that if you calculate the compound growth rate of the German economy, it would produce a trend curved enough to conclude that German GDP was no more than back to trend now.

    With regard to global trend growth, I discussed this issue in more detail in my blog earlier this year: http://reservedplace.blogspot.com/2011/03/setting-record-curved.html

    Clearly, potential growth is an unobservable, tentative variable. I doubt whether it is even smooth, especially at a time of such huge changes as a sixth or so of the world's population rapidly entering the global economy. Given this uncertainty, it seems to me to be unwise to base monetary policy on a target that has to embody some idea of potential RGDP growth. In particular, there will always be pressure to revise the NGDP target up because it is claimed that potential growth has risen, especially during booms (remember "it's a new paradigm", "give growth a chance"?), when the normal response would be to tighten monetary policy. The primary purpose of money is to facilitate transactions, so I would say that the adequacy of the supply of money is best judged according to its ability to reliably serve that purpose - ie by price stability only.

    By the way, I must say that, even as a Briton, I find the constant criticism and demanding of Germany annoying. Every solution to the eurozone crisis - an enhanced EFSF, eurobonds, ECB bond purchases - seems to involve drawing on Germany's wealth. Germany is more concerned with its competitive position in the global economy rather than among the old developed nations, and as your post shows, is presently Europe's most successful large economy. We ought to be thinking about what we can learn from the Germans rather than constantly disparaging them.

  3. The Depression was a wonderful time if you happened to be one of the people with money. Servants were cheap and easy to find. The Germans are probably thinking along those lines.

  4. So assuming that Germany will not accept the higher inflation that would result from a Euro-wide expansion of monetary policy , then the only alternative to a deepening recession is a break up of the Euro-zone so that each country can pursue its own monetary policy.

    Is that where this analysis leads ?

  5. This reminds me of a jesting hypothesis you mentioned in one of your classes last spring that I found interestingly feasible regarding German philosophy.

  6. Since Q3 2008, ngdp in Germany has increased at a 4.3% annual rate, and in the last 2 quarters the rate of increase has been only 2.46% in Q2 and 3.91 in Q3. So even for Germany the rate is below the 5% benchmark.