The paper employs a structural vector auto-regression (SVAR) along the lines of Blanchard and Quah (1989)
and Clarida and Gali (1994) to identify the sources of changes in German international price competitiveness
over the past 30 years. This leads to a separation of the driving forces of the real exchange rate into real demand,
supply, and nominal shocks. Based on this decomposition, it is analysed whether real exchange rate changes
have helped to stabilise output in the post re-unification period and whether such changes have facilitated the
ongoing structural adjustment process of the German economy. The results indicate that real demand and
nominal shocks have been the main drivers of the real exchange rate in the past, whereas output fluctuations
have been almost entirely due to supply shocks. In particular, it turns out that improvements of Germany’s price
competitiveness in the second half of the 1990s have been primarily the result of a relative domestic demand
restraint and hardly that of supply side expansions.
Identifying Determinants of Germany's International Price Competitiveness
A Structural VAR Approach
Working paper
OECD Economics Department Working Papers

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