The impact of aggregate demand shocks on Germany’s trade balance and industry

We examine the impact of aggregate demand shocks on Germany’s trade balance and industry after the adoption of the Euro. Using a Structural Vector Autoregression we find that Germany’s trade balance and industry are highly responsive to aggregate demand shocks. As Germany’s income increases, this leads to an increase in imports and a gradual reduction in its trade balance. However, Germany’s export capacity stabilizes its trade balance. This is over a period of rapid globalization, technological progress confronting all economies, several global trade disruptions and with disturbances to crucial energy requirements for Germany’s industry and export sector.