This study is a revised version of my doctoral dissertation at the Economics Department of the University of Munich. I want to take the opportunity to express my gratitude to some people who have helped me in my work. My greatest thanks go to the supervisor of this dissertation, Professor Claude Billinger. Bis ideas have formed the basis of my work. Be permanently sup ported it with a host of ideas, criticism and encouragement. Furthermore, he provided a stimulating research environment at SEMECON. This study would not have been possible in this form without the help of my present and former colleagues at SEMECON. I am indebted to Rudolf Kohne-Volland, Monika Sebold-Bender and Ulrich Woitek for providing soft ware and guidance for the data analysis. Discussions with them and with Thilo Weser have helped me to take many hurdles, particularly in the early stages of the project. My sincere thanks go to them all. I had the opportunity to present a former version of my growth model at a workshop of Professor Klaus Zimmermann. I want to thank all the parti cipants for their helpful comments. I also acknowledge critical and constructive comments from an anonymous referee. Table of Contents Introduction … … … … … … … … … … … … … … … … . . 1 Part I. Methodology 1. Importance of Stylized Facts… … … … … … … … … … 9 1.1 Limitations of statistical testing… … … … … … … … . . 9 1.2 Evaluating economic models… … … … … … .… . 11 … … 2. Further Methodological Issues … … … … … …… . 13 … …