DP2038 The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State

Author(s): Fabio Canova, Morten O Ravn
Publication Date: December 1998
Keyword(s): currency parity, Redistribution, Subsidies, Tax Incentives, wage parity
JEL(s): B41, E32
Programme Areas: International Macroeconomics, Public Economics, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2038

We study the effects of German unification on macroeconomic variables in a model with capital accumulation, skill differences and a welfare state. The integration of two economies differing in capital holdings and skill distribution is similar to a mass migration of low-skilled agents holding no capital into a foreign country. In the absence of a welfare state, capital holders benefit over the business cycle and depressive long-run consequences ensue. With a welfare state depressive long-run effects are amplified. We examine two policies which may reduce the negative long-run effects. Open economy and sticky wages extensions are considered.