External Shocks and Economic Fragility: Insights from Germany’s Macroeconomic Response

Abstract

This study investigates the macroeconomic effects of exogenous Brent crude oil prices, World Uncertainty Index (WUI), inflation, interest rates, and GDP in Germany. The study is analyzed within the framework of SVAR model using monthly data for the period 2000:Q1-2023:11. The empirical findings are informed by variance decomposition. According to the variance decomposition results, the most effective shocks in interest rate were oil shock by 10.25%, World uncertainty index shock by 5.58%, inflation shock by 4.55% and finally GDP shock by 0.45%. The most effective shocks to inflation were 30.13% from the oil shock, 4.64% from the interest rate shock, 1.22% from the GDP shock and finally 0.51% from the World uncertainty index shock and the most effective shocks to GDP were 17.42% from the oil shock, 2.71% from the inflation shock, 2.43% from the World uncertainty index shock and finally 1.63% from the interest rate shock. These results show the significant vulnerability in the German economy against external shocks. This paper highlights the importance of proactive policy responses to mitigate economic fragility.