Globalization and the effects of changes in functional income distribution on aggregate demand in Germany

Germany has experienced a period of extreme nominal and real wage moderation since the mid 1990s. Contrary to the expectations of liberal economists this has failed to improve Germany’s mediocre economic performance. However, Germany is now running substantial current account surpluses. One possible explanation for Germany’s disappointing performance is found in Kaleckian theory, which highlights that the domestic demand effect of a decline in the wage share will typically be contractionary, whereas net exports will increase (Blecker 1989). The size of the foreign demand effect will critically depend on the degree of openness of the economy. The paper aims at estimating the demand side of a Bhaduri-Marglin (1990) –type model empirically for Germany. The paper builds on the estimation strategy of Stockhammer, Onaran and Ederer (2007) and Hein and Vogel (2008a, 2008b). The main contribution lies in a careful analysis of the effects of globalization. Since Germany is a large open economy by now it is a particularly interesting case study.