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The macroeconomic effects of German unification: Real adjustments and the welfare state

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  • Fabio Canova

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  • Morten O. Ravn

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.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 442.

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Date of creation: Mar 2000
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Handle: RePEc:upf:upfgen:442

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Web page: http://www.econ.upf.edu/

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Keywords: Unification; redistribution; tax distortions; welfare;

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