Business Cycle Analysis with an Equilibrium Model for the German Economy

Controversy rages as to whether the recession in Germany in 2009 was caused by a slump in world trade or by a supply shock due to the problems in the banking sector. According to the new DSGE model developed by the Cologne Institute for Economic Research (IW Köln) the severe downturn in the German economy was triggered by both declining foreign demand and a drop in productivity. However, the productivity shock can also be ex-plained by surplus capacity and declining investment activity. To this extent, therefore, it also reflects a demand shock, though, due to their structure, the DSGE models cannot adequately describe this.