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

  • Fabio Canova

    (Universitat Pompeu Fabra, University of Southampton and CEPR)

  • Morten Ravn

    (London Business School, Universitat Pompeu Fabra and CEPR)

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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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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