Do macroeconomic and financial governance matter? Evidence from Germany, 1950-2019

Abstract

This study hypothesises that economic governance matters for economic performance; neglecting its role in creating positive synergies between macro- and microeconomic institutions has underlain significant coordination failures and costs. This study examines economic governance in the context of mutual feedback between macro-financial governance (FGV), macro-non-financial governance (NFGV), and micro-financial development (FND) in Germany in the period 1950-2019. The study uses an institutionalist approach, introducing two modes of economic governance based on institutional complementarities and tests its hypotheses using both an exhaustive structuralist analysis and a time-series quantitative technique based on the Autoregressive Distributed Lag cointegration model and the Vector Error Correction Mechanism. The study concludes that (i) the German model of economic governance based on the positive complementarities between FGV, NFGV and FND in the period 1950-1982 significantly enhanced real economic performance, that (ii) the fragmentation of the model became a key determinant of the country's weak economic performance in the periods 1983-2019 and 1990-2019, and that (iii) the path-dependence of coordinational mechanisms and underlying institutional dynamics, though fragmented, prevented the genesis and embedding of an irrational exuberance in the country.