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

Fabio Canova and Morten Ravn

No 2038, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: currency parity; Redistribution; Subsidies; Tax Incentives; wage parity (search for similar items in EconPapers)
JEL-codes: B41 E32 (search for similar items in EconPapers)
Date: 1998-12
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Citations: View citations in EconPapers (1)

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Journal Article: The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State (2000)
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