IDEAS home Printed from https://ideas.repec.org/a/red/issued/v3y2000i3p423-460.html
   My bibliography  Save this article

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

Author

Listed:
  • Fabio Canova

    (Universitat Pompeu Fabra and University of Southampton)

  • Morten Ravn

    (London Business School and Universitat Pompeu Fabra)

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)

Suggested Citation

  • Fabio Canova & Morten Ravn, 2000. "The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 423-460, July.
  • Handle: RePEc:red:issued:v:3:y:2000:i:3:p:423-460
    DOI: 10.1006/redy.2000.0096
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1006/redy.2000.0096
    File Function: Full text
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

    File URL: https://libkey.io/10.1006/redy.2000.0096?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. 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(1), pages 1-106.
    3. 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.
    4. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Papers (Old Series) 9312, Federal Reserve Bank of Cleveland.
    5. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    6. Schrettl, Wolfram, 1992. "Transition with Insurance: German Unification Reconsidered," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 144-155, Spring.
    7. 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.
    8. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
    9. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    10. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    11. 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 416-428, March.
    12. 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.
    13. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    14. Benhabib, Jess, 1996. "On the political economy of immigration," European Economic Review, Elsevier, vol. 40(9), pages 1737-1743, December.
    15. Andrea Boltho & Wendy Carlin & Pasquale Scaramozzino, 1999. "Will East Germany become a new Mezzogiorno?," Chapters, in: John Adams & Francesco Pigliaru (ed.), Economic Growth and Change, chapter 13, Edward Elgar Publishing.
    16. 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.
    17. Razin, Assaf & Sadka, Efraim, 1995. "Resisting Migration: Wage Rigidity and Income Distribution," American Economic Review, American Economic Association, vol. 85(2), pages 312-316, May.
    18. Gerlinde Sinn & Hans-Werner Sinn, 1994. "Jumpstart: The Economic Unification of Germany," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691728, December.
    19. 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.
    20. Wendy Carlin & David Soskice, 1997. "Shocks to the System: the German Political Economy Under Stress," National Institute Economic Review, National Institute of Economic and Social Research, vol. 159(1), pages 57-76, January.
    21. Rios-Rull, Jose-Victor, 1993. "Working in the Market, Working at Home, and the Acquisition of Skills: A General-Equilibrium Approach," American Economic Review, American Economic Association, vol. 83(4), pages 893-907, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hughes Hallett, A. & Ma, Y. & Melitz, J., 1996. "Unification and the policy predicament in Germany," Economic Modelling, Elsevier, vol. 13(4), pages 519-544, October.
    2. Leena Rudanko, 2011. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 101(6), pages 2823-2843, October.
    3. Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
    4. Smolny Werner, 2009. "Wage Adjustment, Competitiveness and Unemployment – East Germany after Unification," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 229(2-3), pages 130-145, April.
    5. Smolny, Werner, 2010. "Dynamic adjustment and long-run equilibria: Panel data estimates for the East German states," Economic Modelling, Elsevier, vol. 27(5), pages 1223-1229, September.
    6. van Wincoop, Eric, 1995. "Regional risksharing," European Economic Review, Elsevier, vol. 39(8), pages 1545-1567, October.
    7. Klaus Desmet & Ignacio Ortuño Ortín, 2007. "Rational Underdevelopment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(1), pages 1-24, March.
    8. Alessandro Bucciol, 2007. "Life-Cycle Models, Economic Puzzles and Temptation Preferences," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 115-144, March.
    9. Gao, Xiaodan & Hnatkovska, Viktoria & Marmer, Vadim, 2014. "Limited participation in international business cycle models: A formal evaluation," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 255-272.
    10. Ray Barrell & Dirk Willem Te Velde, 2000. "Catching‐up of East German Labour Productivity in the 1990s," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 271-297, August.
    11. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
    12. Keller, Wolfgang, 2000. "From socialist showcase to Mezzogiorno? Lessons on the role of technical change from East Germany's post-World War II growth performance," Journal of Development Economics, Elsevier, vol. 63(2), pages 485-514, December.
    13. Paus, Eva A., 1998. "Structural adjustment and manufacturing sector competitiveness: Lessons from post-unification East Germany," World Development, Elsevier, vol. 26(10), pages 1839-1857, October.
    14. Athanasopoulos, George & de Carvalho Guillén, Osmani Teixeira & Issler, João Victor & Vahid, Farshid, 2011. "Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions," Journal of Econometrics, Elsevier, vol. 164(1), pages 116-129, September.
    15. Agnès Bénassy-Quéré & Pierre Villa, 1994. "La réunification allemande du point de vue de la politique économique," Working Papers 1994-09, CEPII research center.
    16. Jawadi, Fredj & Soparnot, Richard & Sousa, Ricardo M., 2017. "Assessing financial and housing wealth effects through the lens of a nonlinear framework," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 840-850.
    17. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669, Elsevier.
    18. Kris Jacobs, 2001. "Estimating Nonseparable Preference Specifications for Asset Market Participants," CIRANO Working Papers 2001s-12, CIRANO.
    19. Kevin X.D. Huang & Zheng Liu, 2005. "Temptation and Self-Control: Some Evidence from the Consumer Expenditure Survey," 2005 Meeting Papers 770, Society for Economic Dynamics.
    20. John Driffill & Marcus Miller, 2003. "No Credit for Transition: European Institutions and German Unemployment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(1), pages 41-60, February.

    More about this item

    Keywords

    German unification; capital accumulation; skill differences; credit constraints; the welfare state;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:v:3:y:2000:i:3:p:423-460. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.