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

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  • Canova, Fabio
  • Ravn, Morten O

Abstract

We study the effects of German unification on macroeconomic variables in a model with capital accumulation, skill differences and a welfare state. The integration of two economies differing in capital holdings and skill distribution is similar to a mass migration of low-skilled agents holding no capital into a foreign country. In the absence of a welfare state, capital holders benefit over the business cycle and depressive long-run consequences ensue. With a welfare state depressive long-run effects are amplified. We examine two policies which may reduce the negative long-run effects. Open economy and sticky wages extensions are considered.

Suggested Citation

  • Canova, Fabio & Ravn, Morten O, 1998. "The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State," CEPR Discussion Papers 2038, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2038
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    More about this item

    Keywords

    currency parity; Redistribution; Subsidies; Tax Incentives; wage parity;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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