Alternative Theories of Output, Unemployment, and Inflation in Germany: 1960-1985

This book is motivated by the disagreement among Monetarist, Keynesian, and New Classical economists about the short-term determinants of output, unemployment, and inflation. It exposes the reader to a synthesis modeling approach which allows the derivation of the opposing theories as special cases from a single general framework, so that the macroeconomic controversy is reduced to tests of alternative statistical hypotheses. While similar studies have been conducted for the U.S. economy, this study is the first to consider an open economy and "let the data speak" about the determinants of output, unemployment, and inflation in Germany. The analysis proceeds in two steps. First, the empirical validity of commonly maintained hypotheses about the behavior of macrovariables under fixed and flexible exchange rates is assessed. The results provide useful information for the specification of a structural model of the German economy. Second, the general macrodynamic model is specified which implies the opposing schools of thought as special cases. The competing hypotheses are tested with nested regression equations to avoid the observational equivalence problem