A Note on the Real Exchange Rate Effect of German Unification

Charles Wyplosz

No 527, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is often believed that the German Economic and Monetary Unification will result in an appreciation of the DM. This conclusion is reached when attention is exclusively directed to the short-run demand side. In this note, it is shown that supply-side and long-term considerations suggest instead that the DM will depreciate in the long term. The reason is that the absorption into the new DM-zone of an area with initially scant productive assets amounts to a permanent fall in per capita wealth of the new Germany relative to the old one. An alternative interpretation is that the real depreciation is required to compensate a worsened net asset position (as Germany borrows abroad to finance capital accumulation). While the short-run effect is ambiguous, a real depreciation is shown to be possible, and the conditions for it to happen are spelled out.

Keywords: Capital Accumulation; Exchange Rate; External Borrowing (search for similar items in EconPapers)
Date: 1991-03
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