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

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Author Info
Fabio Canova (Universitat Pompeu Fabra, University of Southampton and CEPR)
Morten Ravn (London Business School, Universitat Pompeu Fabra and CEPR)

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Abstract

We study the effects of German unification in a model with capital accumulation, skill differences and a welfare state. We argue that this event is similar to a mass migration of low-skilled agents holding no capital into a foreign country. Absent a welfare state, we observe an investment boom, depressed output and employment conditions. Capital owners and high-skilled agents are willing to give up to 4% of per-capita consumption to favor unification. When a welfare state exists the investment boom disappears and the recession is prolonged. Now, with unification, capital owners and high-skilled agents lose 4% of per-capita consumption. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.2000.0096
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 3 (July)
Pages: 423-460
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Handle: RePEc:red:issued:v:3:y:2000:i:3:p:423-460

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Related research
Keywords: German unification; capital accumulation; skill differences; credit constraints; the welfare state;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F22 - International Economics - - International Factor Movements and International Business - - - International Migration
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Boltho, Andrea & Carlin, Wendy & Scaramozzino, Pasquale, 1997. "Will East Germany Become a New Mezzogiorno?," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 241-264, June. [Downloadable!] (restricted)
    Other versions:
  2. Gerlinde Sinn & Hans-Werner Sinn, 1994. "Jumpstart: The Economic Unification of Germany," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691728.
  3. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January. [Downloadable!] (restricted)
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    Other versions:
  6. Razin, Assaf & Sadka, Efraim, 1995. "Resisting Migration: Wage Rigidity and Income Distribution," CEPR Discussion Papers 1091, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December. [Downloadable!] (restricted)
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    Other versions:
  10. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-1), pages 1-106. [Downloadable!]
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  12. Morten O. Ravn & Fabio Canova, 1997. "Crossing the Rio Grande: Migrations, Business Cycles and the Welfare State," Economics Working Papers 248, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 1997. [Downloadable!]
    Other versions:
  13. Hughes Hallett, A J & Ma, Yue, 1993. "East Germany, West Germany, and Their Mezzogiorno Problem: A Parable for European Economic Integration," Economic Journal, Royal Economic Society, vol. 103(417), pages 416-28, March. [Downloadable!] (restricted)
  14. Driffill, John & Marcus Miller, 1998. "No Credit for Transition:Efficiency Wages, the Maastricht Treaty and German Unemployment," CSGR Working papers series 04/98, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  15. Graziella Bertocchi and Michael Spagat, 2001. "The Evolution of Modern Educational Systems," Royal Holloway, University of London: Discussion Papers in Economics 01/4, Department of Economics, Royal Holloway University of London, revised Sep 2001. [Downloadable!]
  16. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Paper 9312, Federal Reserve Bank of Cleveland. [Downloadable!]
  17. Canova, Fabio & Marrinan, Jane, 1998. "Sources and propagation of international output cycles: Common shocks or transmission?," Journal of International Economics, Elsevier, vol. 46(1), pages 133-166, October. [Downloadable!] (restricted)
  18. Schrettl, Wolfram, 1992. "Transition with Insurance: German Unification Reconsidered," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 144-55, Spring.
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  21. Bertocchi, Graziella & Spagat, Michael, 2004. "The evolution of modern educational systems: Technical vs. general education, distributional conflict, and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 559-582, April. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Harald Uhlig, 2008. "The Slow Decline of East Germany," NBER Working Papers 14553, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. GianMarco Ottaviano & Giovanni Peri, 2004. "The Economic Value of Cultural Diversity: Evidence from US cities," Econometric Society 2004 North American Summer Meetings 91, Econometric Society. [Downloadable!]
    Other versions:
  3. Harald Uhlig, 2007. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," Kiel Working Papers 1311, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  4. Jens Rubart & Willi Semmler, 2007. "East German Unemployment from a Macroeconomic Perspective," Darmstadt Discussion Papers in Economics 187, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  5. Assaf Razin & Effraim Sadka & Phillip Swagel, 1998. "Tax Burden and Migration: A Political Economy Theory and Evidence," NBER Working Papers 6734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Paul Levine & Emanuela Lotti & Joseph Pearlman, 2003. "The Immigration Surplus Revisited in a General Equilibrium Model with Endogenous Growth," Department of Economics Discussion Papers 0203, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  7. Stephen Drinkwater & Paul Levine & Emanuela Lotti & Joseph Pearlman, 2003. "The Economic Impact of Migration: A Survey," Department of Economics Discussion Papers 0103, Department of Economics, University of Surrey. [Downloadable!]
  8. Boldrin, Michele & Canova, Fabio, 2003. "Regional Policies and EU Enlargement," CEPR Discussion Papers 3744, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Nicola Fuchs-Schündeln & Rima Izem, 2007. "Explaining the Low Labor Productivity in East Germany. A Spatial Analysis," Kiel Working Papers 1307, Kiel Institute for the World Economy. [Downloadable!]
  10. Birk, Angela, 2004. "Sequential Migration, and the German Reunification," Discussion Paper Series 26338, Hamburg Institute of International Economics. [Downloadable!]
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