Germany’s Growth Prospects against the Backdrop of Demographic Change

Abstract

This paper shows how the German Council of Economic Experts (GCEE) determines Germany’s potential output, and compares the results with those of the European Commission. The approach of the European Commission is a natural benchmark, as it provides the basis for the deficit and debt rules of the European Union. In comparison with the European Commission’s method, the GCEE’s method places greater emphasis on demographic factors in estimating labour input. Additionally, both approaches differ regarding how they estimate the structural unemployment rate and total factor productivity. Finally, this paper discusses the limitations of, and the different options for estimating potential output.

Demographic Aging and Long-Run Economic Growth in Germany

“…This approach of analyzing potential output through production functions, viewed as the economy's equilibrium output trajectory, is well-established. Following this tradition, particularly prevalent in policy-making circles (CBO 1995, Havik et al 2014, Shackleton 2018, Chalaux and Guillemette 2019, Breuer and Elstner 2020, we estimate the inputs of capital and labor, along with total factor productivity. We then apply a Cobb-Douglas aggregator to compute potential output.…”

“…Similar needs arise for capital and labor inputs. Many production function approaches, such as the approach by the European Commission often employ the Hodrick and Prescott (1997) filter to differentiate between transient and permanent signals (Havik et al 2014, Shackleton 2018, Chalaux and Guillemette 2019, Breuer and Elstner 2020. However, this approach has serious shortcomings.…”

“…1 -6 as aggregation rules for the estimated trend components. This approach, commonly used in the literature and at policy institutitions and (international) organizations such as the OECD (Chalaux and Guillemette 2019), the European Commission (Havik et al 2014) and the German Council of Economic Experts (Breuer and Elstner 2020). However, unlike the aforementioned institutions that rely on the Hodrick and Prescott (1997)-filtered means of the trends, we apply this procedure to the entire distribution samples.…”

The Cyclical Adjustment Procedure of the German Debt Brake: a Plea for Methodical Reforms

“…Oft auftretende Revisionen des Potenzials verringern zudem die Planungssicherheit des öff entlichen Haushalts. Andere Vorschläge fordern Verbesserungen der Schätzmethode (Ademmer et al, 2019;Fuest et al, 2019;Breuer und Elstner, 2020)…”