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

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  • Canova, Fabio
  • Ravn, Morten O.

Abstract

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2038.

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Date of creation: Dec 1998
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Handle: RePEc:cpr:ceprdp:2038

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Keywords: currency parity; Redistribution; Subsidies; Tax Incentives; wage parity;

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