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History, Expectations, and Public Policy: Economic Development in Eastern Germany

  • Andreas Schäfer
  • Thomas Steger

Motivated by the process of economic development in Eastern Germany since the German reunification we set up a dynamic macroeconomic model of a small open economy where both capital and labor are mobile and there are increasing returns to scale at the aggregate level. The model features multiple equilibria as well as (local and global) indeterminacy. Expectations matter for resulting equilibrium dynamics, implying that economic confidence may be crucial for the process of economic development. Despite its simplicity, the model can replicate major empirical facts and bears a number of non-trivial implications.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3184.

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Date of creation: 2010
Date of revision:
Handle: RePEc:ces:ceswps:_3184
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  1. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  2. Michael C. Burda, 2007. "What kind of shock was it? Regional Integration and Structural Change in Germany after Unification," Kiel Working Papers 1306, Kiel Institute for the World Economy.
  3. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 368-374, May.
  4. Jennifer Hunt, 2006. "Staunching Emigration from East Germany: Age and the Determinants of Migration," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 1014-1037, 09.
  5. Michael Funke & Holge Strulik, 1999. "Growth and Convergence in a Two-Region Model of Unified Germany," CESifo Working Paper Series 206, CESifo Group Munich.
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