A1352
Title: Measuring the impact of aggregate demand shocks on Germany's trade balance and industry using Bayesian SVARs
Authors: Lebogang Mateane - University of Cape Town (South Africa) [presenting]
Abstract: The effects of aggregate demand shocks on Germany's trade balance and industry are measured using Bayesian structural vector autoregressions. The period after the adoption of the Euro is examined because this period coincides with rapid globalization and technological progress confronting all economies and a period characterized by several global trade disruptions and disturbances to crucial energy requirements for Germany's industry and export sector. The motivation is the empirical fact that most economies increase imports as their income increases, eventually leading to a deterioration of their trade balance. In contrast, using sign restrictions, recursive identification restrictions and employing a diffuse Normal-Wishart prior with Minnesota-style shrinkage of the prior parameter variance-covariance matrix, it is found that Germany's trade balance and industry are highly responsive to aggregate demand pressures. As Germany's income increases, this leads to an increase in imports and a gradual reduction in its trade balance rather than a deterioration of its trade balance. Therefore, Germany's export capacity stabilizes its trade balance and allows convergence. This finding reinforces that globalization accelerated the deterioration of the manufacturing sector in the United States of America but not in Germany.
