Having the high unemployment in Germany in mind, this book discusses how macroeconomic theory has evolved over the past forty years. It shows that in recent years a convergence has taken place, with modern models embodying a Keynesian transmission mechanism, monetarist policy implication, and modeling techniques inspired by new classical economics and real business cycle theory. It also probes in which direction models may be extended from here. Empirically, the book uses different econometric techniques to investigate the relevance and implications of different macroeconomic theories for German data. A key question this book investigates is the role of demand and supply side conditions for the increase in the German unemployment rate. On a policy level, the book relates the implications of the different theories to the ongoing debate on the appropriate roles of demand and supply side policies for curing the German unemployment problem.

Introduction.- Keynesian and Monetarist Views on the German Unemployment Problem.- The Rational Expectations Revolution.- Monetary Policy in the New Keynesian Model.- Introducing Nonlinearities into the New Keynesian Model.- Revisiting the Natural Rate Hypothesis.- Concluding Remarks.