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Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale

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  • Andreas Schäfer
  • Thomas Steger

Abstract

What are the dynamic consequences of comprehensive integration shocks? The answer to this question appears all but trivial. 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. Hence, expectations matter for resulting equilibrium dynamics. Despite its simplicity, the model creates a rich set of plausible implications. Our analysis contributes to a better understanding of the interaction between expectations and fundamentals in models with indeterminacy. The model is applied to replicate two striking empirical characteristics of macroeconomic development in East Germany since 1991.

Suggested Citation

  • Andreas Schäfer & Thomas Steger, 2011. "Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale," CESifo Working Paper Series 3676, CESifo.
  • Handle: RePEc:ces:ceswps:_3676
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    Cited by:

    1. Bretschger, Lucas & Schaefer, Andreas, 2017. "Dirty history versus clean expectations: Can energy policies provide momentum for growth?," European Economic Review, Elsevier, vol. 99(C), pages 170-190.
    2. Grossmann, Volker & Schäfer, Andreas & Steger, Thomas & Fuchs, Benjamin, 2017. "Reversal of migration flows: A fresh look at the German reunification," Journal of International Economics, Elsevier, vol. 109(C), pages 1-15.
    3. García-Hiernaux, Alfredo & Guerrero, David E. & McAleer, Michael, 2016. "Market integration dynamics and asymptotic price convergence in distribution," Economic Modelling, Elsevier, vol. 52(PB), pages 913-925.
    4. Andreas Schaefer, 2017. "Enforcement of Intellectual Property, Pollution Abatement, and Directed Technical Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(3), pages 457-480, March.
    5. Böhm, Sebastian, 2015. "Regional economic integration and factor mobility in unified Germany," FSES Working Papers 463, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    6. Grossmann, Volker & Schäfer, Andreas & Steger, Thomas M., 2015. "On the Interaction Between Migration, Capital Formation, and the Price for Housing Services," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113172, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    increasing returns to scale; capital mobility; migration; multiple equilibria; indeterminacy; history vs. expectations;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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