DP527 A Note on the Real Exchange Rate Effect of German Unification
|Publication Date:||March 1991|
|Keyword(s):||Capital Accumulation, Exchange Rate, External Borrowing|
|JEL(s):||130, 430, 440|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=527|
It is often believed that the German Economic and Monetary Unification will result in an appreciation of the DM. This conclusion is reached when attention is exclusively directed to the short-run demand side. In this note, it is shown that supply-side and long-term considerations suggest instead that the DM will depreciate in the long term. The reason is that the absorption into the new DM-zone of an area with initially scant productive assets amounts to a permanent fall in per capita wealth of the new Germany relative to the old one. An alternative interpretation is that the real depreciation is required to compensate a worsened net asset position (as Germany borrows abroad to finance capital accumulation). While the short-run effect is ambiguous, a real depreciation is shown to be possible, and the conditions for it to happen are spelled out.