- International Monetary Fund
- Published Date:
- January 1989
ArgyVictor“Choice of Intermediate Money Target in a Deregulated and Integrated Economy with Flexible Exchange Rates,”Staff PapersInternational Monetary Fund (Washington) Vol. 30 (December1983) pp. 727–754.
ArtusJacques R.“The Disequilibrium Real Wage Rate Hypothesis—An Empirical Evaluation,”Staff PapersInternational Monetary Fund (Washington) Vol. 31 (June1984) pp. 249–302.
BangemannMartin“Standort Bundesrepublik in Gefahr?”WirtschaftswocheNo. 43 (October161987) p. 48.
BiedenkopfKurt H.“Zu Perspektiven der Wirtschaftspolitik” (mimeographed; BonnJanuary1988).
BlejerMario and Ke-YoungChueds.Measurement of Fiscal Impact—Methodological Issues Occasional Paper No. 59 (Washington: International Monetary FundJune1988).
Board of Governors of the Federal Reserve SystemFederal Reserve Bulletin (Washingtonvarious issues).
BurdaMichael C.“Is There a Capital Shortage in Europe?”Weltwirtschaftliches Archiv (Kiel) Vol. 124 (1988) pp. 38–57.
BurdaMichael C. and Jeffrey D.Sachs“Institutional Aspects of High Unemployment in the Federal Republic of Germany,”NBER Working Paper No. 2241 (Cambridge, Massachusetts: National Bureau of Economic ResearchMay1987).
BurtlessGary“Jobless Pay and High European Unemployment,” in Barriers to European Growth: A Transatlantic Viewed. byR.Z.Lawrence and C.L.Schultze (Washington: The Brookings Institution1987) pp. 105–162.
CoeDavid T.“Nominal Wages, the NAIRU and Wage Flexibility,”OECD Economic Studies (Paris) No. 5 (1985) pp. 87–126.
CoeDavid T. and F.Cagliardi“Nominal Wage Determination in Ten OECD Economies,”OECD Working Paper No. 19 (Paris: Organization for Economic Cooperation and Development, Economics and Statistics DepartmentMarch1985).
Deutsche BundesbankMonthly Report of the Deutsche Bundesbank and Supplements (Frankfurtvarious issues).
Deutsche Bundesbank“The Bundesbank’s Transactions in Securities Under Repurchase Agreements,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 35 (May1983) pp. 23–30.
Deutsche Bundesbank (1985a) “The Longer-Term Trend and Control of the Money Stock,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 37 (January1985) pp. 13–26.
Deutsche Bundesbank (1985b) “Freedom of Germany’s Capital Transactions with Foreign Countries,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 37 (July1985) pp. 13–23.
Deutsche Bundesbank (1985c) “Recent Developments with Respect to the Bundesbank’s Securities Repurchase Agreements,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 37 (October1985) pp. 18–24.
Deutsche Bundesbank (1987a) The Deutsche Bundesbank: Its Monetary Policy Instruments and Functions Special Series No. 7 (Frankfurt: Deutsche Bundesbank2nd ed.October1987).
Deutsche Bundesbank (1987b) Report of the Deutsche Bundesbank for the Year 1986 (Frankfurt: Deutsche Bundesbank1987).
Deutsche Bundesbank (1988a) “Trends in the Euro-Deposits of Domestic Nonbanks,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 40 (January1988) pp. 13–21.
Deutsche Bundesbank (1988b) “The Economic Scene in the Federal Republic of Germany Around the Turn of 1987–88,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 40 (February1988) pp. 5–42.
Deutsche Bundesbank (1988c) “Methodological Notes on the Monetary Target Variable M3,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 40 (March1988). pp. 18–21.
Deutsche Bundesbank (1988d) “Recent Trends in Nonresidents’ Investment Behavior in the Bond Market,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 40 (July1988) pp. 13–18.
Deutsche Bundesbank (1988e) “The Economic Scene in the Federal Republic of Germany in Summer 1988,”Monthly Report of the Deutsche Bundesbank (Frankfurt) Vol. 40 (September1988) pp. 5–42.
Deutsche Bundesbank (1988f) Report of the Deutsche Bundesbank for the Year 1987 (Frankfurt: Deutsche Bundesbank1988).
DongesJuergen B.Klaus-DieterSchmidt and othersMehr Strukturwandel für Wachstum und Beschäftigung (Tübingen: J.C.B. Mohr (Paul Siebeck)1988).
EngelsW.“Tax Reforms in Germany,”paper presented at the conference on “A Supply-Side Agenda for Germany?”held onJune 29–30, 1988 in CologneFederal Republic of Germany.
EnglanderSteven and AxelMittelstädt“Total Factor Productivity: Macroeconomic and Structural Aspects of the Slowdown,”OECD Economic Studies (Paris) No. 10 (Spring1988) pp. 7–56.
European CommunitiesOfficial Journal of the European Communities (Brusselsvarious issues).
European CommunitiesThe Agricultural Situation in the Community—1987 Report (Brussels; Luxembourg1988).
European CommunitiesEUROSTAT Agricultural Prices (Luxembourgvarious issues).
European CommunitiesYearbook of Agricultural Statistics (Luxembourgvarious issues).
European CommunitiesEuropean Community—News (Washington; New Yorkvarious issues).
Federation of the German Stock ExchangesAnnual Report 1987 (Frankfurt: Federation of the German Stock Exchanges1988)
Germany Federal Republic of Bundesministerium der FinanzenFinanzbericht (Bonnvarious issues).
Germany Federal Republic of Bundesministerium der FinanzenTasks and Objectives of a New Fiscal Policy: The Limits to Public Indebtedness (Bonn1985).
Germany Federal Republic of Bundesministerium der FinanzenThe Eleventh Subsidy Report (Bonn1987).
Germany Federal Republic of Bundesministerium der Finanzen Federal GovernmentJahreswirtschaftsbericht [Annual Report] (Bonn1988).
Germany Federal Republic of Bundesministerium der Finanzen Federal GovernmentAktuelle Beiträge zur Wirtschafts- und Finanzpolitik (Bonnvarious issues).
Germany Federal Republic of Bundesministerium der Finanzen Ministry of EconomicsBMWI Tagesnachrichten (Bonnvarious issues).
Germany Federal Republic of Bundesministerium der Finanzen Statistisches BundesamtAussenhandel (Wiesbadenvarious issues).
Germany Federal Republic of Bundesministerium der Finanzen Statistiches BundesamtStatistisches Jahrbuch (Wiesbadenvarious issues).
Germany Federal Republic of Bundesministerium der Finanzen Statistiches BundesamtVolkswirtschaftliche Gesamtrechnungen (Wiesbadenvarious issues).
Germany Federal Republic of Bundesministerium der Finanzen Statistiches BundesamtWirtschaft und Statistik (Wiesbadenvarious issues).
GuitiánManuel“The European Monetary System: A Balance Between Rules and Discretion” Part I in Policy Coordination in the European Monetary System Occasional Paper No. 61 (Washington: International Monetary FundSeptember1988).
GundlachErich“Gibt es genügend Lohndifferenzierung in der Bundesrepublik Deutschland?”Die Weltwirtschaft (Tübingen) No. 1 (1986) pp. 74–78.
HellerPeter S.Richard D.Haas and Ahsan S.MansurA Review of the Fiscal Impulse Measure Occasional Paper No. 44 (Washington: International Monetary FundMay1986).
HerdmannUte and Frank D.Weiss“Wirkungen von Subventionen und Quoten—Das Beispiel der EG-Stahlindustrie,”Die Weltwirtschaft (Tübingen) No. 1 (July1985) pp. 101–113.
Institut der deutschen Wirtschaft“Schwerpunkt: Standort Bundesrepublik Deutschland,”IW-Trends (Cologne) Vol. 15 (February1988).
International Monetary FundInternational Financial Statistics (Washingtonvarious issues).
International Monetary Fund“European Community Issues Directive to Liberalize All Capital Movements,”IMF Survey (Washington) Vol. 17 (August291988) pp. 283–84.
International Monetary FundWorld Economic Outlook: A Survey by the Staff of the International Monetary Fund (Washingtonvarious issues).
JäckelPeter“Industriekonjunktur leicht aufwärts gerichtet,”IFO Schnelldienst (Munich) No. 9 (March1988) pp. 3–8.
KeesingDonald B. and MartinWolfTextile Quotas Against Developing Countries (London: Trade Policy Research Center1980).
KellyMargaret and othersIssues and Developments in International Trade Policy Occasional Paper No. 63 (Washington: International Monetary FundDecember1988).
KenwardL.R.“Perspectives on the International Competitive Position of the U.S. Steel Industry,”IMF Working Paper No. 87/8 (Washington: International Monetary FundFebruary1987).
KirmaniNaheedPierluigiMolajoni and ThomasMayer“Effects of Increased Market Access on Exports of Developing Countries,”Staff PapersInternational Monetary Fund (Washington) Vol. 31 (December1984) pp. 661–84.
KremersJ.“Aspects of Money Control in Germany” (unpublished; Washington: International Monetary Fund1988).
LayardR. and G.Basevi“Europe: The Case for Unsustainable Growth” (Brussels: Centre for European Policy StudiesMay1984).
LeibfritzW. and R.Parsche“Steuerbelastung der Werkzeugmaschinenindustrie im Internationalen Vergleich,”IFO Schnelldienst (Munich) No. 9 (March1988) pp. 9–16.
LipschitzL.“Wage Gaps, Employment, and Production in German Manufacturing” (unpublished; Washington: International Monetary Fund1986).
MadisonJ.“No. 10: Madison,” in The Federalist Papers with an introduction by Clinton Rossiter (New York: New American Library1961) pp. 77–84.
MayerT.“Economic Structure, the Exchange Rate and Adjustment in the Federal Republic of Germany: A General Equilibrium Approach,”IMF Working Paper No. 88/79 (Washington: International Monetary FundSeptember1988).
McDonaldDonogh (1988a) “An Econometric Analysis of Machinery and Equipment Investment in Germany” (unpublished: Washington: International Monetary Fund1988).
McDonaldDonogh (1988b) “The Implications of Differential Growth Rates Among EMS Countries” (unpublished; Washington: International Monetary Fund1988).
McDonaldDonogh (1988c) “The Measurement of Stock Market Wealth and Its Impact on Consumption Behavior” (unpublished; Washington: International Monetary Fund1988).
OchelWolfgang and ManfredWegner“Dienstleistungen in Europa,”IFO Schnelldienst (Munich) No. 14/15 (May1987) pp. 11–15.
OlsonMancurThe Logic of Collective Action; Public Goods and the Theory of Groups (Cambridge, Massachusetts: Harvard University Press1971).
Organization for Economic Cooperation and DevelopmentDevelopment Cooperation (Parisvarious issues).
Organization for Economic Cooperation and DevelopmentEconomic Outlook (Parisvarious issues).
Organization for Economic Cooperation and DevelopmentMain Economic Indicators (Parisvarious issues).
Organization for Economic Cooperation and DevelopmentQuarterly National Accounts (Parisvarious issues).
Organization for Economic Cooperation and DevelopmentEconomic Surveys: Germany (ParisJune1986).
Organization for Economic Cooperation and DevelopmentThe Tax/Benefit Position of Production Workers 1981–85 (Paris1986).
Organization for Economic Cooperation and DevelopmentHistorical Statistics 1960–86 (Paris1987).
Organization for Economic Cooperation and DevelopmentStructural Adjustment and European Performance (Paris1987).
Organization for Economic Cooperation and DevelopmentEconomic Surveys: Germany (ParisJune1988).
RosenblattJ. and othersThe Common Agricultural Policy of the European Community: Principles and Consequences Occasional Paper No. 62 (Washington: International Monetary FundNovember1988).
RussoMassimo“Cooperation and Coordination in the EMS—The System at a Crossroad,” in The International Monetary System and Economic Development: A Challenge to the International Economic Cooperation proceedings from the Malente Symposium VIIed. byChristianDräger and LotharSpäth (Baden-Baden: Nomos Verlagsgesellschaft1988) pp. 281–312.
RussoMassimo and GuiseppeTullio“Monetary Coordination Within the European Monetary System” Part II in Policy Coordination in the European Monetary System Occasional Paper No. 61 (Washington: International Monetary FundSeptember1988).
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung [Council of Economic Advisors]Vorrang für die Wachstumspolitik—Jahresgutachten 1987/88 (Stuttgart am Mainz: Verlag W. Kohlhammer1987).
SeffenA.“Entwicklung der Krankenversicherungsfinanzen seit 1970,”IW-Trends (Cologne) Vol. 14 (December201987) pp. D1–D10.
SoltwedelRudiger and othersDeregulierungspotentiale in der Bundesrepublik (Tübingen: J.C.B. Mohr (Paul Siebeck)1986).
SpinangerDean and JoachimZietz“Managing Trade but Mangling the Consumer: Reflections on the EEC’s and West Germany’s Experience with the Multi-Fiber Arrangement,”Aussenwirtschaft (Bern) Vol. 41 (1986) pp. 511–531.
TanziVito“Tax Reform in Industrial Countries and the Impact of the U.S. Tax Reform Act of 1986,”IMF Working Paper No. 87/61 (Washington: International Monetary FundSeptember1987).
ThormählenThies and Hans-BodoLeibinger“Sachverständigenrat: Zahlenmagier am Budget,”WirtschaftsdienstNo. 1 (1987) pp. 45–52.
UngererHorst and othersThe European Monetary System: Recent Developments Occasional Paper No. 48 (Washington: International Monetary FundDecember1986).
WeissFrank D.“Importrestriktionen der Bundesrepublik Deutschland,”Die Weltwirtschaft (Tübingen).No. 1 (July1985) pp. 88–100.
Recent Occasional Papers of the International Monetary Fund
42. Global Effects of Fund-Supported Adjustment Programs, by Morris Goldstein. 1986.
43. International Capital Markets: Developments and Prospects, by Maxwell Watson, David Mathieson, Russell Kincaid, and Eliot Kalter. 1986
44. A Review of the Fiscal Impulse Measure, by Peter S. Heller, Richard D. Haas, and Ahsan H. Mansur. 1986.
45. Switzerland’s Role as an International Financial Center, by Benedicte Vibe Christensen. 1986.
46. Fund-Supported Programs, Fiscal Policy, and Income Distribution: A Study by the Fiscal Affairs Department of the International Monetary Fund. 1986.
47. Aging and Social Expenditure in the Major Industrial Countries, 1980–2025, by Peter S. Heller, Richard Hemming, Peter W. Kohnert, and a Staff Team from the Fiscal Affairs Department. 1986.
48. The European Monetary System: Recent Developments, by Horst Ungerer, Owen Evans, Thomas Mayer, and Philip Young. 1986.
49. Islamic Banking, by Zubair Iqbal and Abbas Mirakhor. 1987.
50. Strengthening the International Monetary System: Exchange Rates, Surveillance, and Objective Indicators, by Andrew Crockett and Morris Goldstein. 1987.
51. The Role of the SDR in the International Monetary System, by the Research and Treasurer’s Departments of the International Monetary Fund. 1987.
52. Structural Reform, Stabilization, and Growth in Turkey, by George Kopits. 1987.
53. Floating Exchange Rates in Developing Countries: Experience with Auction and Interbank Markets, by Peter J. Quirk, Benedicte Vibe Christensen, Kyung-Mo Huh, and Toshihiko Sasaki. 1987.
54. Protection and Liberalization: A Review of Analytical Issues, by W. Max Corden. 1987.
55. Theoretical Aspects of the Design of Fund-Supported Adjustment Programs: A Study by the Research Department of the International Monetary Fund. 1987.
56. Privatization and Public Enterprises, by Richard Hemming and Ali M. Mansoor. 1988.
57. The Search for Efficiency in the Adjustment Process: Spain in the 1980s, by Augusto Lopez-Claros. 1988.
58. The Implications of Fund-Supported Adjustment Programs for Poverty: Experiences in Selected Countries, by Peter S. Heller, A. Lans Bovenberg, Thanos Catsambas, Ke-Young Chu, and Parthasarathi Shome. 1988.
59. The Measurement of Fiscal Impact: Methodological Issues, edited by Mario I. Blejer and Ke-Young Chu. 1988.
60. Policies for Developing Forward Foreign Exchange Markets, by Peter J. Quirk, Graham Hacche, Viktor Schoofs, and Lothar Weniger. 1988.
61. Policy Coordination in the European Monetary System. Part 1: The European Monetary System: A Balance Between Rules and Discretion, by Manuel Guitián. Part II: Monetary Coordination Within the European Monetary System: Is There a Rule? by Massimo Russo and Giuseppe Tullio. 1988.
62. The Common Agricultural Policy of the European Community: Principles and Consequences, by Julius Rosenblatt, Thomas Mayer, Kasper Bartholdy, Dimitrios Demekas, Sanjeev Gupta, and Leslie Lipschitz. 1988.
63. Issues and Developments in International Trade Policy, by Margaret Kelly, Naheed Kirmani, Miranda Xafa, Clemens Boonekamp, and Peter Winglee. 1988.
64. The Federal Republic of Germany: Adjustment in a Surplus Country, by Leslie Lipschitz, Jeroen Kremers, Thomas Mayer, and Donogh McDonald. 1989.
Note: For information on the titles and availability of Occasional Papers published prior to 1986, please consult the most recent IMF Publications Catalog or contact IMF Publication Services.
The terms of trade gain is calculated as the difference between the external surplus evaluated at actual export and import prices and the surplus that would have resulted if there had been no change in export and import prices.
In fact, public investment and transfers were more severely affected by expenditure restraint than public consumption (see Section III).
A small decline in the share of nominal depreciation in GNP also contributed to the rise in the net national saving rate over 1982–87.
A special scheme encouraged businesses to bring their investment in machinery and equipment forward from 1984 to 1983 and their construction investment from 1985 to 1984. The actual rates of growth of private investment in machinery and equipment in 1983, 1984, and 1985 were 6, -½ of 1, and 9 percent, respectively. Calculations in McDonald (1988a) suggest that, in the absence of the special investment scheme, growth rates would have been on the order of 2½, 6, and 5½ percent in these three years, respectively. An incentive scheme also affected the timing of residential construction.
Not all of the increased surplus of national saving over fixed investment went into the current account; there was also a turnaround in stockbuilding from -½ of 1 percent of GNP in 1982 to ½ of 1 percent of GNP in 1987.
The foreign balance on a national accounts basis excludes transfers, while the data on the current account, from the external accounts, include transfers. Nominal transfers abroad declined by about ¼ of 1 percent of GNP over this period.
There are various discrepancies in trade volumes between customs data and national accounts data; for example, the customs data exclude trade with the German Democratic Republic and use unit values, while the national accounts include trade with the German Democratic Republic and use base-period-weighted price indices.
The turnaround in the balance on services reflected an increased deficit on tourism (owing to higher domestic income and the appreciation of the deutsche mark) and a reduced surplus on investment income (owing chiefly to lower interest rates and the depreciation of receipts denominated in U.S. dollars).
While the data in Table A13 suggest some shift to nontradables production in 1986, as nontradables production grew faster in 1986–87 than in 1985, the pattern is somewhat distorted by investment incentives that shifted construction from 1985 to 1984, thereby depressing the growth rate in 1985 and boosting it in 1986.
The Bundesbank is also obliged to support the general economic policy of the Federal Government but subject to the provision that this does not prejudice its basic aim of safeguarding the currency (Article 12 of the Bundesbank Act); the Bundesbank is independent of instructions from the Federal Government. See Chapter 1 of Deutsche Bundesbank (1987a) for a discussion of the origins of the Bundesbank, its constitution, and its functions.
Of course, this focus on potential output is not without difficulty. In particular, the concept of productive potential is not an easy one and equally respectable estimates of productive potential may differ.
From 1975 to 1978, the target was a single number; for 1975 the target covered the period December to December and for 1976–78 it was on an annual average basis. For a discussion of the first ten years of monetary targeting, see Deutsche Bundesbank (1985a).
Thus, in calculating central bank money, currency in circulation has a weight of 100 percent, sight deposits have a weight of 16.6 percent, time deposits of less than four years’ maturity have a weight of 12.4 percent, and savings deposits of less than four years’ maturity, a weight of 8.1 percent.
In 1978, the growth of central bank money exceeded the point target by 3 percentage points, as the Bundesbank was confronted with strong upward pressure on the deutsche mark.
The Bundesbank has indicated that domestic considerations were also a factor. Moreover, in Germany, the exchange rate cannot easily be separated from domestic considerations, as manufacturing is said to be quile sensitive to exchange rate developments and exports have been an important driving force in the economy.
The Bundesbank acquires foreign exchange by “active” intervention (i.e., buying foreign currencies) and “passive” intervention (i.e., refraining from its normal practice of selling its regular foreign exchange receipts in the market).
See Deutsche Bundesbank (1985b) for a review of the history of capital controls in Germany.
With effect from August 1984, a 25 percent withholding tax on interest payments to foreign holders of bonds issued by German residents was abolished: this had been the last significant regulatory disincentive to capital flows into Germany. Over the ensuing two years, the Bundesbank took a number of measures to liberalize the rules on the range of financial assets that could be issued in the German financial markets—beginning in May 1985, floating rate notes, swap-related bonds, and zero coupon bonds were permitted and, as of May 1986, the Bundesbank lifted its objections to the issuance of certificates of deposit. There was also a liberalization of rules governing the activities of foreign financial institutions with a presence in the German market. From May 1985, such institutions were permitted to lead-manage issues of foreign deutsche mark bonds and, in June 1986, foreign banks were admitted to the federal bond consortium. In 1987, the period of notice that issuers of foreign deutsche mark bonds are required to give the Bundesbank before a new issue was reduced to one full business day, compared with the previous requirement of two weeks’ notice.
Most of the appreciation was reversed in the first nine months of 19KB. In September 1988, the nominal effective value of the deutsche mark was only ¼ of 1 percent higher than in December 1986. Over the same period, the deutsche mark appreciated by 6¾ percent against the U.S. dollar.
The data on foreign exchange flows in Table A18 are based on monthly average data (to correspond with the central bank money data) and thus can differ from changes in the external position of the Bundesbank in the external accounts; the latter reflect the actual flow during the period in question.
Open market operations in securities’ repurchase agreements are the principal tool used by the Bundesbank for guiding money market conditions on an ongoing basis. See Deutsche Bundesbank (1983, 1985c, and 1988e, p, II) for further information on securities’ repurchase agreements. Deutsche Bundesbank (1987a) contains a detailed discussion of the various monetary policy instruments used in Germany.
This is not meant to imply that foreign exchange intervention is irrelevant. It may alter outcomes, particularly over shorter periods, through the signals it sends to market participants. Moreover, when the scale of intervention is large, the ability of the Bundesbank to manage money market conditions is reduced as it is forced to cut back the scale of securities’ repurchase agreements, which are its principal and most flexible tool for guiding the money market on an ongoing basis.
It is worth noting, however, that the difference in the growth rates of sight deposits and currency in 1987 was almost entirely attributable to the slow growth of sight deposits in the fourth quarter of the year.
In principle, holdings of deutsche mark bank notes by foreign residents would also be excluded from the German money supply but it is not possible to identify holders of bank notes. Holdings by German residents of foreign currency deposits with the German banking system are included in the German money supply.
While the growth of nominal demand did not slow down in 1987. Ml (which may be a more appropriate variable to focus on from a transactions perspective) also grew at a similar pace to that of the previous year. Nominal domestic demand grew by 4½ percent during 1987 while Ml grew at about 8½ percent. Even if one prefers to focus on sight deposits because of the problems in interpreting currency developments, the same picture of relatively easy monetary conditions is apparent since sight deposits grew at a rate of 7½ percent in the course of 1987.
This calculation is based on data for deposits placed by nonbank German residents with external branches and affiliates of German banks.
Short-term bank bonds were made subject to reserve requirements with effect from May 1986. This eliminated one of the principal attractions of such bonds for issuers and investors and precipitated a sharp decline in the value of short-term bank bonds outstanding. For further discussion of this and other factors behind the strong growth of external deposits in 1986, see Deutsche Bundesbank (1988a) and pp. 17–19 of this section.
In comparison to an aggregate including these external deposits and short term bank bonds, M3 understated liquidity growth by about ¼ of I percent during 1987.
External deutsche mark deposits of German residents were equivalent to about 5 percent of M3 at the end of 1987.
For a discussion of the change in the targeted aggregate, see Deutsche Bundesbank (1988c).
See Kremers (1988). where the differences in the behavior of central bank money and M3 are examined econometrically. The results confirm that, in the long term, the two aggregates grow in tandem but that there can be significant short-term differences in their growth rates.
This, however, may not be sufficient grounds for preferring M3 over central bank money as a monetary target. Kremers (1988). drawing on Argy (1983), analyzes the desirability of alternate monetary targets in the context of an open economy subject to different types of shocks. The choice of target variable should be influenced by the controllability of the alternative aggregates and the stability of their respective links with the economic variables in which the policymakers are ultimately interested (e.g., prices and output). Leaving aside these considerations, it can be said that for financial shocks involving portfolio shifts within the components of M3, M3 is likely to be a better target than central bank money. For other financial shocks and for real shocks, however, the determination of which aggregate is a superior target is somewhat more complex.
Through June central bank money was growing at an annual rate of 8¼ percent.
Rediscount quotas were reduced at the beginning of February 1988; this was a technical move to allow the Bundesbank greater influence on money market conditions through repurchase operations.
In September, M3 was 6½ percent above the target base on a seasonally adjusted annualized basis, while central bank money had increased by 7½ percent over the same period.
The Lombard rate was reduced from 5.5 percent to 5 percent. In February and March, the Bundesbank conducted four-week repurchase agreements at a fixed rate of 3.8 percent, compared with the 4,35 percent in effect for most of 1986. (Repurchase agreement rates had been somewhat higher toward the end of 1986 and in the one agreement conducted in January 1987.) The rate at which the Bundesbank offered treasury bills to the banks (normally for a three-day period) was lowered from 4 percent to 3.5 percent; this rate acts as a floor to the money market.
At the same time as the repurchase rate was reduced, the three-day treasury bill rate was lowered to 3.2 percent.
On September 23, the rate was raised from 3.6 percent to 3.65 percent, followed by a move to 3.75 percent on October 7 and 3.85 percent on October 14. These were the actual allotment rates under minimum interest rate lenders. (The minimum interest rates quoted by the Bundesbank were 3.5 percent on September 23 and 3.6 percent at the following two tenders.)
First, as the repurchase agreements over this period were conducted as minimum interest tenders, banks that bid at or above the allotment rates set by the Bundesbank were provided all the funds they bid for at the allotment rates. Second, there was not a sharp jump in money market rates for maturities of two months and less; these rates moved up moderately, and only by a little more than the increases in the repurchase rate. As a result, an unusually large gap opened up between these rates and the rate on three-month money.
On October 19, the Bundesbank moved substantial federal government deposits from its own books to the banking system: on October 20, it reduced the repurchase rate to 3.8 percent (compared with 3,85 percent the previous week); and the following week it supplied liquidity to the market through foreign exchange swaps.
This reduced the discount rate to an historically low level. The previous low point was a rate of 2¾ percent, which was in effect for only a few months in 1959.
There was also substantial intervention in support of the dollar by many central banks. Worldwide accumulation of official U.S. dollar reserves was mil much smaller than the U.S. current account deficit in 1987.
Although the average government bond yield, based on all bonds with a remaining maturity of more than three years, did show some downward movement, it reflected the influence of Bundesbank action on shorter-term bond yields within this category.
Bond purchases of domestic nonbank investors, which amounted to DM 12 billion in 1986 and DM 34 billion in 1987 (Table A20). remained significantly below the average level of 1980–8? (DM 43 billion). Thus, despite the increase of nominal household income of about 10 percent over 1986–87, an increase in the savings rate, and a sharp steepening of the yield curve, nonbank residents reduced the nominal value of bond purchases compared with earlier years. Moreover, a large proportion of the bond purchases by nonbank residents in 1986–87 went into bonds denominated in foreign cur rency and, when one takes this into account, the decline in the purchase of deutsche mark bonds was even more pronounced. See Deutsche Bundesbank (1988d) for further discussion of the investment behavior of domestic nonbanks in the bond market.
Chart 8 compares the average public sector bond yield in 1987 with yield levels over the period 1956–86. Only in one year (1978) was the bond yield lower than in 1987 and then only by a small amount.
These borrowers’ notes were quite popular with foreign investors prior to the abolition of the coupon tax in 1984 as they were not subject to the tax. Since the abolition of the tax, foreign investors have been reducing their holdings of such notes as they have come due and replacing them with bonds in their portfolios. Consolidating official borrowers’ notes with bonds, nonresident net purchases of bonds declined from DM 54 billion in 1986 to DM 23 billion in 1987.
In the absence of the increased foreign demand, the reduced interest of domestic residents in the bond market would have put upward pressure on yields. To this extent, the increased foreign demand reflected the process by which interest differentials were kept consistent with exchange rate expectations and factors affecting the degree of substitutability between deutsche mark and U.S. dollar assets.
Thus, domestic demand for foreign currency bonds was strong over the period March to July 1987, as foreign exchange markets stabilized and investors were attracted by the high yields on these bonds. With the unsettled conditions in foreign exchange markets in the last quarter of the year, resident net purchases of foreign currency bonds dropped sharply. As relative calm returned to the foreign exchanges during most of the first half of 1988, foreign currency bonds again became a major focus of bond purchases by German residents.
A very large pan of German equity is held by nonfinancial corporations and banks, who tend to view these as longer-term investments. The household sector, which is a relatively small holder of equity by international standards, is also believed to take a longer-term view in its purchases and sales in the equity market.
Share prices in December 1986 were, however, about 10 percent below their peak in mid-April 1986.
In part the sharper fall in German prices is likely to have reflected the impact of exchange market uncertainty on the prospects of export-oriented producers in conjunction with the greater dependence of German producers on the export market (see discussion below). Changes in the market’s perception of future profitability of a company, however, are also likely to have a greater impact on share values of more highly leveraged companies, and German enterprises are typically more highly leveraged than those in the United States or the United Kingdom. Of course, this doesn’t explain developments in Japan where enterprises are also relatively highly leveraged.
See Deutsche Bundesbank (1988b), pp. 17–18 for a discussion of how export market considerations seem to have affected German equity prices in late 1987 and early 1988.
A discussion of intramarginal intervention in the EMS in 1986 can be found on pp. 70–71 of Deutsche Bundesbank (1987b). The corresponding discussion of intramarginal intervention in 1987 is on pp. 64–70 of Deutsche Bundesbank (1988f).
Normally, the three-month Euro-deutsche mark deposit rate on the interbank market lies below the corresponding Frankfurt rate, but for much of 1986 it was higher than the Frankfurt rate. (See Deutsche Bundesbank (1988a).)
First, net intramarginal intervention against the deutsche mark was on a smaller scale in 1987 (see Deutsche Bundesbank (1988c, p, 68)) and given new arrangements in the EMS for financing such intervention (ibid., pp. 64–70), there was no need for other EMS central banks to run down their deutsche mark deposits. Second, the German current account surplus fell in 1987. Finally, as already discussed arbitrage between low Euromarket rates and German bond yields was less prominent in 1987.
Most important among these inflows are interest income and foreign currency exchanged by foreign troops stationed in Germany.
Once approval is given for the intramarginal intervention, financing may occur without further approval.
The actual liquidity impact over time depends on the extent to which the intervening central bank repays the credit from the very short-term financing facility in the intervention currency or in other currencies (including the ECU). The central hank providing credit can request repayment in its own currency. Moreover, there is nothing, in principle, to prevent the central bank that provides credit from taking offsetting (sterilizing) actions in its domestic money market.
The period of tension at the end of October and in early November 1987 marked the first use of the joint facility for the financing of intramarginal intervention, in conjunction with the other elements of the strategy worked out at the Basle-Nyborg meetings (i.e., greater use of the band and coordinated interest rate policy).
See Russo (1988) for a discussion of these issues.
See International Monetary Fund (1988).
To the extent that inflation is very low in the slower-growing countries, this may become more difficult as it might require declines in nominal price levels in the faster-growing countries. This aside, there seems little that aggregate demand policies in the low-growth countries can do on a lasting basis to accommodate differential underlying growth rates. To the extent that rigidities impede growth in the low-growth countries, action to reduce these rigidities would reduce the need for terms of trade changes.
The general government consists of the social security system and the territorial authorities. The term territorial authorities refers to the Federal and Lander Governments, the municipalities, the Burden Equalization Fund, the European Recovery Program Fund, and the European Communities’ Accounts. While fiscal policy is conducted at the level of the territorial authorities, the following discussion refers to the general government in order to take into account changes in the social security system that were also implemented during the period under review.
Other government revenues, at 4 percent of GNP, were higher in 1982–8? than in the periods before and after (Table A24). This reflected exceptionally high transfers of profits from the Bundesbank to the Federal Government, which contributed to fiscal consolidation (see also below).
With the ratio of the federal debt to GNP amounting to 21.3 percent of GNP by the end of 1985 and an underlying rate of nominal GNP growth of around 4½ percent, the federal deficit consistent with a stable ratio of the federal debt to GNP was slightly below 1 percent of GNP. compared with the actual federal deficit in 1985 of 1.3 percent of GNP. Similarly, with debt of the territorial authorities amounting to 41.2 percent of GNP by the end of 1985, the deficit consistent with the stabilization of this ratio was 1.9 percent; the actual deficit, however, was 2.1 percent.
See Bundesministerium der Finanzen. Finanzbericht 1987 (Bonn. 1986), p. 76.
The 4 percent increase in the labor costs of the states reflected a 3.4 percent increase in public sector wages together with some wage drift. Labor costs of municipalities increased by 5¼ percent owing to the above factors and a 1½ percent increase in the number of employees. Higher current transfers at the municipal level were due to a rise in social aid, inter alia, to the long-term unemployed; in the case of the states, the sharp increase in transfers was chiefly elicited by an increase in support to regions that depend upon the steel and coal mining industries.
Companies are allowed to reduce their prepayments of corporation tax when they expect a decline in profits.
The strong increase in revenues from the wealth tax (23 percent). income tax (7 percent), and the value-added tax (7 percent) allowed total tax revenues to rise by 3½ percent despite the decline in revenues from the corporation tax (Table A29).
Consequently, the amount paid by the pension fund for the health insurance of retirees fell by 8½ percent while the contributions by individuals increased by 4 percent.
At the end of 1987, almost half a million people were enrolled in training programs or benefited from employment creation measures—11 percent more than at the end of 1986.
Owing to the increase in the deficit of the territorial authorities, public debt increased from 41 percent of GNP in 1986 to 42 percent of GNP in 1987 (Table A31).
A discussion of tax reform is included in Section IV.
This allows a reduction of interest rates on these loans to about 2 percentage points below market rates. Since the local governments have to provide matching funds, this program is expected to support DM 40 billion of investment over the three-year period. It is not clear, however, to what extern this will be additional investment and to what extent it will simply be a change in the financing of investment that would have occurred anyway.
This program is administered by Kreditanstalt für Wiederaufbau (KfW), a publicly owned bank. Under the program. KfW raises money in the capital market and extends loans to small and medium-sized enterprises at the prime rate, that is, without the interest markup customarily charged by commercial banks for credits to these enterprises.
In April 1988, DM 240 million was transferred from the Bundesbank to the Federal Government, down from DM 7.3 billion in 1987 and DM 12.7 billion in 1986.
See also Section IV.
A dampening effect on public expenditure growth was expected from the relatively small wage increase (of 2 percent for 1988 as a whole) for public sector employees. In addition, only a slight increase in capital expenditures was expected owing to sluggish investment spending by municipalities. Investment expenditures of local authorities would have declined in 1988 if the Federal Government had not decided to offer DM 5 billion in loans in this year at subsidized interest rates.
Despite an increase in pensions of only 3 percent, a rise in the number of retirees and the gradual extension of pension benefits to all mothers born in the years before 1921 meant that pension outlays were likely to increase at a higher rate than contributions.
The staffs recent projections were made in December 1988. They differ, therefore, from 1988 budgetary estimates contained in Tables A24–A28 and A30, which are the projections of the German authorities, based on revenue estimates made in May 1988.
The deficit projected for the territorial authorities by 1992 is, however, still slightly above a level consistent with a stable debt-to-GNP ratio and nominal GNP growth of 4½ percent a year in the medium term.
This is not to imply that public financial balances should in principle be measured excluding net operating profits of the central bank (see Blejer and Chu (1988)). In Germany, however, accounting principles of the Bundesbank contribute to the year-to-year variation of Bundesbank profits.
For a review of fiscal impulse measures see Heller and others (1986).
See, for example, Thormählen and Leibinger (1987) for a critical discussion of recent estimates of the structural budget balance for Germany. The above estimates are also distorted by year-lo-year variations of Bundesbank profits, related to the accounting practices of the Bundesbank.
It is noteworthy that a considerable step toward quantitative consolidation was already taken in 1982, the year before the present conservative-liberal coalition was able to shape fiscal policy. This is not apparent from the actual budget balances in 1981–82, which changed only little during this period, since the economic downturn inflated the deficits of 1982.
The output gap is the gap between potential output and actual output. In Section IV. evidence is presented that suggests that the high unemployment rate in Germany mostly reflects institutional rigidities and inappropriate relative factor prices rather than deficient demand.
See Federal Republic of Germany (1988, pp. 14–15).
This is hardly a new discovery. For example, in 1787 James Madison observed: “A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation and involves the spirit of party and faction in the necessary and ordinary operations of government” (Madison, 1961, p. 79).
In 1986, about 45 percent of the employed wage and salary earners subject to social security taxes were members of a union (Statistisches Bundesamt. Statsstisches Jahrbuch, 1957, Tables 6.8.1 and 26.13).
According to the so-called Allgemeinverbindlichkeitserklärung. Section 5 of the Wage Contract Law (Tarifvertragsgesetz) of 1969, a State Minister of Labor may, at the request of either bargaining party, declare an agreement generally binding if this is deemed in the public interest, provided more than half the employees in the relevant sector are employed by firms party to the agreement. Such a declaration renders an agreement binding for all employees irrespective of union membership and all employers irrespective of membership of an employer’s federation. While only a relatively small number of wage agreements are subject to a declaration in any year, the possibility that a request may be made to a Minister of Labor influences the behavior of unions and employers’ associations.
In many service industries employer membership in bargaining confederations is more limited than in manufacturing, and thus fewer employers are legally bound by agreements unless these agreements are extended.
The comparison between developments in the services sector in the United States and Germany is particularly striking and is discussed in detail in Burda and Sachs (1987).
The comparison with the United States is striking, see Burtless (1987).
The “Beschäftigungsförderungsgesetz” of 1985.
The other countries are Austria. France. Italy. Sweden, the United Kingdom, and the United States.
From a supply-side perspective, real investment would appear to be a more appropriate concept than investment expressed in nominal prices.
Real business gross fixed investment was about ½ of 1 percentage point of GNP lower on average during the period 1980-87, compared with the period 1960–69.
Thus, the drop in the ratio of construction investment to GNP has been greater in constant prices than in current prices while the converse applies to machinery and equipment investment.
By capital intensity of production is meant the ratio of the net capital stock to GNP. both measured in constant 1980 prices.
The price of capital services includes financing costs (the cost of debt and equity finance) and tax factors, as well as the price of capital goods.
This reflected, inter alia, the growth of labor market rigidities and a sharp rise in real wage gaps that were dealt with at some length in Lipschitz (1986) and were also discussed in the previous section, dealing with the labor markets.
Conventional production functions show that the rate of return to a factor falls with the intensity of its use in the production process.
Labor-augmenting technical progress manifests itself in labor becoming more efficient over time. The empirical evidence in McDonald (1988a) suggests that technical progress in Germany has been principally labor-augmenting. This is also the type of technical progress assumed in Lipschitz (1986) and Burda and Sachs (1987). Only labor-augmenting technical progress is consistent with a steady stale. With capital-augmenting or disembodied technical progress, a constant price of capital relative to the price of output would produce a falling capital/output ratio. Autonomous technical progress comes through total factor productivity and has no influence on the equilibrium capital/labor ratio.
In principle, assuming constant returns to scale, and given the significant unemployment rate, one could increase the capital stock and avoid a reduction in the marginal product of capital by absorbing sufficient labor to maintain the prevailing capital/labor ratio. This would only be possible, however, if unemployed labor was equal in quality with employed labor and if an increased supply of capital did not require a higher return to capital.
The analysis in McDonald (1988a) indicates that the capital/output ratio desired by investors would respond with an elasticity of a half to changes in the real user cost of capital; this result is consistent with the results obtained by Lipschitz (1986) in his study of the German manufacturing sector.
Under this scenario, the capital/output and investment/output ratios would decline, but the effects of this on investment would be more than offset by the impact of a higher output level.
Countries that were technologically behind in the early postwar years experienced very rapid technical progress during the catchup period.
As noted earlier, Gundlach (1986) provides evidence that the adverse implications of the collective bargaining process for labor market flexibility appear to have become more prominent since the mid-1970s. Moreover, there has been a pronounced shift in the composition of government subsidies away from general subsidies to subsidies for weak sectors, such as mining, iron and steel, and shipbuilding.
The decision to bring forward DM 5 billion of the 1990 tax cuts to 1988 was announced on the occasion of a Group of Six meeting on February 22, 1987 (Louvre Accord), ‘this, it was thought, would help bolster domestic demand and contribute both to stronger growth and a more rapid reduction of the current account surplus.
The most important, and controversial, single measure is the introduction of a 10 percent withholding tax on interest income with effect from 1989, interest income is in principle subject to income taxation; however, since interest payments are not reported to the tax authorities by financial institutions, the declaration of interest income has been left to the taxpayers. This has given rise to widespread tax evasion. Under the new law, the financial institutions will be responsible for collecting and transferring to the authorities the withholding tax on interest income. Interest payments to both domestic and foreign residents will be subject to this tax. The financial institutions will issue a certificate for the amount paid, which the taxpayer then may deduct from his income tax obligations when he files his income tax declaration. The same procedure will apply to foreign residents who are covered by a double taxation agreement of their home country with the Federal Republic of Germany. Interest on savings accounts and part of the interest accumulated in life insurance schemes will be exempt from the withholding tax. In addition, churches, charitable institutions, political parties, pension plans, professional associations, and certain banks engaged in the execution of public programs will be completely or partly exempted from the tax.
Here, and elsewhere in the paper, direct taxes are defined to exclude social security contributions.
Cuts in direct taxes, however, will be partly offset by increases in indirect taxes in order to finance higher contributions by Germany to the EC budget and transfers to the Federal Labor Office and “structurally weak” federal states (see Section III).
Present rates including social security contributions, however, are well above the sample average.
See Leibfritz and Parsche (1988). Their calculations indicate that under the present tax system, profits of a company producing machinery and equipment, for example, are taxed at an effective rate of about 55–60 percent in Germany, but at only 44 percent in the United States and 23 percent in Switzerland. Tax reform in Germany will not narrow this gap significantly.
There are, however, plans for a continuation of the tax reform process during the next legislative period (1991–94) focusing in particular on a reform of business taxation.
See pp. 30-37 and Engels (1988).
About 18 percent of the expenditures or the pension system are covered by contributions from the federal budget.
At present, the formal link is still to gross income increases, but over recent years a discretionary element has been introduced with the result that pensions have in the event increased more in line with net incomes.
Between 1976 and 1987, six laws were passed with a view to containing medical costs, see Seffen (1987, pp. D1–D10).
This reduction may, however, only be temporary as the aging population could raise the demand for medical services in the more distant future and, as a consequence, require an increase in the rate of contribution.
Under this program, part or all of the wage of a worker who was previously unemployed is paid, for a specified period, by the unemployment insurance system.
In Table A40, the dispersion of protection across industries has been calculated. The coefficients of variation increase from less than ½ for tariff protection to 1 for total nominal protection and 2 for total effective protection. This gives an indication of the relative importance of nontariff barriers, including subsidies, and tariff escalation in the external protection of certain industries.
Some private researchers use even broader definitions and consequently arrive at higher estimates for subsidies in Germany.
While subsidy payments have also remained largely unchanged at 5.4 percent of federal government expenditures since 1982, tax preferences have increased from 6.5 percent of total tax revenues in 1982 to 7.4 percent in 1987 (they are projected to increase further to 7.7 percent in 1988 but to fall from 1990 onward).
The share of subsidies to households has declined from 44 percent in 1985 to an estimated 38½ percent in 1988.
In 1960–80, the reallocation of labor from agriculture to other sectors, in particular services, proceeded at a similar pace in Germany to that in the other EC countries, but, since 1980, there has been a slowdown in Germany in reallocating labor. The share of agricultural employment in total employment declined by only 5 percent between 1980 and 1986 in Germany while it fell by about 12½ percent in the EG on average (Table A49).
For a description of the institutional setting of the CAP and a discussion of its economic effects, see Rosenblatt and others (1988).
A further freeze of agricultural prices in ECU terms was decided in mid-1988 for the marketing year 1988/89.
See Rosenblatt and others (1988) for detailed information on the evolution and functioning of the agrimonetary system of the CAP.
Since the compensation was formally treated as a value-added tax rebate, both the Federal and Länder Governments, which share value-added tax revenues, had to contribute.
Co-responsibility levies are meant to lei producers share in, or bear, the cost of price support. Guarantee thresholds serve the same purpose by penalizing surplus production through reduction in the intervention price in the period following the one in which the threshold has been exceeded.
In Germany, a large number of farmers are close to retirement age.
Imports of coal are subject to a quota and discouraged by the high subsidies for the use of German coal. In 1987, 7.4 million tons of coal were imported, less than half of the amount allowed under the quota. Most of these imports were offset by subsidized exports of German coal to other members of the ECSC.
Nevertheless, subsidies continued to flow. In 1980–85, about DM 87 billion was transferred from national governments to the EC steel industry (Table A59). At about DM 56 a ton, the steel subsidy in Germany amounted to about one fourth of that in other major producers. The highest subsidies were paid in Italy, followed by Belgium, France, and the United Kingdom.
Financial aid to companies that closed down plants, however, continued to be permitted.
Bilateral agreements have governed EC trade in steel with third countries since 1978. For a description of recent changes in these agreements see Kenward (1987).
See Council Directive of January 26, 1987, on aid to shipbuilding in Official Journal of the European Communities (Paris). No. L 69 (March 12, 1987), pp. 55–60.
“Deutsche Airbus” is a subsidiary of the largely privately owned arms and aircraft manufacturer Messerschmidt-Bölkow- Blohm.
Since airplanes are priced in U.S. dollars, the exchange rate of European currencies vis-à-vis the dollar is an important factor for the profitability of Airbus Industrie. For the models A3G0 and A310, cost calculations were based on an exchange rate of DM 2.30 per U.S. dollar; for the A320, the rate was DM 2 per U.S. dollar. A depreciation of the dollar below these rates implies the need for additional subsidies for aircraft production.
The Government will, however, retain its shares in Saarbergwerke and Salzgitter, two loss-making coal and steel companies.
The antitrust law and the exemptions granted to certain services industries are at present under review. The Government received the report of an expert commission in May 1988. On the basis of this report it will decide on the extent to which a reform of the law is warranted.
Calculations by the OECD in 1986 showed that valuing assets at replacement cost, the debt/equity ratio in Germany was about twice the level as that in the United States and the United Kingdom, though about the same as that in Japan. See OECD (1986, p. 49).
Data come from the Federation of the German Stock Exchanges (1988).
The stock exchanges judge the qualifications of an institution to bring a firm to this new market segment.
The regulated free market was abolished at the beginning of May 1988: thus, there are again three segments to the German equity market.
For more details, see the Federation of German Stock Exchanges (1988).
This tax (Börsenumsatzsteuer) is levied at a basic rate of 0.25 percent on secondary dealings in shares and bonds, with lower rates applying to certain transactions, including residents’ transactions with foreigners. Transactions between banks and transactions involving bonds of the federal and state governments are not subject to the tax.
In the case of foreign investors who can take advantage of tax treaties, this would involve having their application certified by their domestic tax authorities, effectively alerting them to the foreign source income. Thus, to the extent that such investors were previously evading taxes in their home country, there would also be an additional tax burden on them.
The withholding tax on such policies would apply to interest earnings related to the excess of the actual interest rate over 3.5 percent; no refunds would be available for taxes withheld. The yield is expected to be in the region of DM 1¼ billion, or more than one quarter of the total expected revenue yield from the withholding tax.
There is speculation that this reflects fears in the market that the rate of withholding might be increased at a later stage; indeed, the academic advisory committee to the Ministry of Finance had recommended a withholding rate of 25 percent.
These are average yields for the bonds issued by the two groups of borrowers. The actual levels of the yields for the two groups may not be strictly comparable, for example, because of differences in the maturities of outstanding bonds or differences in bond quality; however, changes in the yield differential between these two groups should be able to give an indication of the impact of the withholding tax.
Similar effects of the proposed withholding tax are implied by some recent issues of foreign deutsche mark bonds by prime international borrowers; in some cases yields on such issues have been up to ½ of 1 percentage point lower than yields on German Federal Government bonds of similar maturities. It does not follow From the above analysis that yields on domestically issued deutsche mark bonds have increased by ½ of 1 percent or so above what they would have been without the proposed withholding tax; the withholding tax may also have pushed down yields on foreign deutsche mark bonds in light of the higher demand for such bonds as a result of the withholding tax.
This is one of the areas being examined by the working group formed by the German stock exchanges. Some legal impediments currently affect the operation of forward markets in Germany. First, only registered traders, stock market operators, and nonresidents can be legally bound to a forward transaction; under the Civil Code, forward transactions are regarded as gambling and a private resident can withdraw from a forward contract by making a gambling plea. Second, insurance companies and investment companies are not allowed to participate in forward market trading. Legislation is currently planned that would establish the legal basis for futures trading and would amend the Civil Code to make forward market contracts binding on all, and plans are under way to open a futures exchange toward the end of 1989 or in early 1990.
Most domestic bond issues (certain bonds with equity characteristics are an exception) have to be approved by the Federal Government to ensure that the borrower is sufficiently sound, Moreover, the issuer of the bond usually is required to provide satisfactory collateral against the bond issue. This in general provides little difficulty for banks since many of their bond issues are backed by liabilities of the federal, state, or local governments or by mortgages; it is, however, a disincentive to nonbanks issuing bonds on the domestic segment of the deutsche mark bond market. Finally, domestic bond issues (but not foreign bond issues by external affiliates) are part of the base on which the trade tax (Gewerbesteuer) on capital is levied.
These issues of foreign deutsche mark bonds are channeled through external affiliates or subsidiaries, which act as a “foreign” issuer, usually the issue is guaranteed by the domestic parent company. The size of domestic industrial issues is negligible.
Of a total of about 800 insurance companies that existed in 1980, about 280 had market shares below 0.1 percent, while the largest conglomerate accounted for about 45 percent of the market (ibid., pp. 26–27).
Indeed, Institut der deutschen Wirtschaft (1988) found that telecommunication costs in Germany were about 22 percent above the average of 11 industrial countries. They were about 171 percent above costs in Sweden, where telecommunications services were cheapest.
Soltwedel and others (1986, p. 220). Long-distance trucking by manufacturing companies themselves (Werksverkehr) has increased considerably over recent years despite the requirement that company-owned trucks must not transport other loads and are therefore often forced to return empty from their destinations of delivery. This can be taken as an indication that prices charged by transportation companies are excessive.
See Bangemann (1987).
Only a third of this 30 percent, however, is accounted for by commercial trucking companies; the remainder consists of suppliers’ own trucking services.
Trucking companies in these countries are subject to fewer regulations and have to pay lower taxes than those in Germany.
A common assumption in economic forecasting with macro-economic models is that dB equals zero, that is, that there are no changes in the structural environment. Thus, projections depend only on the assumed changes of exogenous macroeconomic variables (A).
A period of about two years appeared to be appropriate for various reasons. For instance, the historical experience of the two oil price shocks in the 1970s seemed to suggest that up to two years were needed until all the effects of the price changes had worked their way through the economy. Moreover, the trade equations of the macroeconomic model also indicated a two-year lag until relative price changes were fully felt in the economy.
Note that in this and the following scenarios it was assumed that fixed real wages above full employment levels gave rise to classical unemployment.