Paper presented at the Conference “New economic concepts in the current European crises“.

Abstract: The collapse of Lehmann brothers in September 2008 is generally seen as the starting point of what so far already turns out to be the greatest economic crisis since the Great Depression. It is generally agreed that the economy at large thus has entered a period which structurally differs from the previous period. And somewhat ironically it arguably was the ignorance of the possibility of a major shift in market dynamics which triggered the financial crisis which triggered the macroeconomic collapse. This paper aims to discuss the capabalities and the limits of so-called state-space models which take account of the different states which the economy or a market can be bedded within. It is structured into two parts: First, I will outline some the general idea of state-space models and elaborate their workings by using financial market data which is their main field of application. Subsequently, I will discuss some inherent weaknesses of these models.