Modelling economies subject to structural change: The case of Germany

Abstr. structural change is traditionally central to the analysis of economic developments in East Europe and the former Soviet Union, but is also applicable in the case of Germany following reunification. Conventional econometric analysis rests largely on a search for structural stability and the belief that the future will be similar to the past. But this is not a tenable assumption in the face of the degree of change which we have observed in these economies. In this paper we continue a line of argument that econometric modelling can still be a useful tool but that it must take explicit account of the form of change which has taken place. The underlying philosophy is that the very near future will be similar to the very recent past, but we must understand the changes in the past to say anything useful about the future. We will explore the implications of this approach for what is perhaps the most drastic structural change which has so far been observed, the unification of Germany.