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

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Author Info
Fabio Canova (Universitat Pompeu Fabra, University of Southampton and CEPR)
Morten Ravn (London Business School, Universitat Pompeu Fabra and CEPR)

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Abstract

We study the effects of German unification in a model with capital accumulation, skill differences and a welfare state. We argue that this event is similar to a mass migration of low-skilled agents holding no capital into a foreign country. Absent a welfare state, we observe an investment boom, depressed output and employment conditions. Capital owners and high-skilled agents are willing to give up to 4% of per-capita consumption to favor unification. When a welfare state exists the investment boom disappears and the recession is prolonged. Now, with unification, capital owners and high-skilled agents lose 4% of per-capita consumption. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.2000.0096
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 3 (2000)
Issue (Month): 3 (July)
Pages: 423-460
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Handle: RePEc:red:issued:v:3:y:2000:i:3:p:423-460

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Related research
Keywords: German unification; capital accumulation; skill differences; credit constraints; the welfare state;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F22 - International Economics - - International Factor Movements and International Business - - - International Migration
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

References listed on IDEAS
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  1. Driffill, John & Marcus Miller, 1998. "No Credit for Transition:Efficiency Wages, the Maastricht Treaty and German Unemployment," CSGR Working papers series 04/98, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
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    Other versions:
  3. Graziella Bertocchi and Michael Spagat, 2001. "The Evolution of Modern Educational Systems," Royal Holloway, University of London: Discussion Papers in Economics 01/4, Department of Economics, Royal Holloway University of London, revised Sep 2001. [Downloadable!]
  4. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Paper 9312, Federal Reserve Bank of Cleveland. [Downloadable!]
  5. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January. [Downloadable!] (restricted)
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  7. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March. [Downloadable!] (restricted)
  8. Canova, Fabio & Marrinan, Jane, 1998. "Sources and propagation of international output cycles: Common shocks or transmission?," Journal of International Economics, Elsevier, vol. 46(1), pages 133-166, October. [Downloadable!] (restricted)
  9. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Schrettl, Wolfram, 1992. "Transition with Insurance: German Unification Reconsidered," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 144-55, Spring.
  11. Razin, Assaf & Sadka, Efraim, 1995. "Resisting Migration: Wage Rigidity and Income Distribution," American Economic Review, American Economic Association, vol. 85(2), pages 312-16, May. [Downloadable!] (restricted)
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  12. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March. [Downloadable!] (restricted)
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  13. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December. [Downloadable!] (restricted)
  14. Benhabib, Jess, 1996. "On the political economy of immigration," European Economic Review, Elsevier, vol. 40(9), pages 1737-1743, December. [Downloadable!] (restricted)
  15. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  16. Rios-Rull, Jose-Victor, 1993. "Working in the Market, Working at Home, and the Acquisition of Skills: A General-Equilibrium Approach," American Economic Review, American Economic Association, vol. 83(4), pages 893-907, September. [Downloadable!] (restricted)
  17. Bertocchi, Graziella & Spagat, Michael, 2004. "The evolution of modern educational systems: Technical vs. general education, distributional conflict, and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 559-582, April. [Downloadable!] (restricted)
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  18. Morten O. Ravn & Fabio Canova, 1997. "Crossing the Rio Grande: Migrations, Business Cycles and the Welfare State," Economics Working Papers 248, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 1997. [Downloadable!]
    Other versions:
  19. Hughes Hallett, A J & Ma, Yue, 1993. "East Germany, West Germany, and Their Mezzogiorno Problem: A Parable for European Economic Integration," Economic Journal, Royal Economic Society, vol. 103(417), pages 416-28, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. GianMarco Ottaviano & Giovanni Peri, 2004. "The Economic Value of Cultural Diversity: Evidence from US cities," Econometric Society 2004 North American Summer Meetings 91, Econometric Society. [Downloadable!]
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  2. Harald Uhlig, 2007. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," Kiel Working Papers 1311, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  3. Jens Rubart & Willi Semmler, 2007. "East German Unemployment from a Macroeconomic Perspective," Darmstadt Discussion Papers in Economics 187, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  4. Assaf Razin & Effraim Sadka & Phillip Swagel, 1998. "Tax Burden and Migration: A Political Economy Theory and Evidence," NBER Working Papers 6734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Paul Levine & Emanuela Lotti & Joseph Pearlman, 2003. "The Immigration Surplus Revisited in a General Equilibrium Model with Endogenous Growth," Department of Economics Discussion Papers 0203, Department of Economics, University of Surrey. [Downloadable!]
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  6. Stephen Drinkwater & Paul Levine & Emanuela Lotti & Joseph Pearlman, 2003. "The Economic Impact of Migration: A Survey," Department of Economics Discussion Papers 0103, Department of Economics, University of Surrey. [Downloadable!]
  7. Boldrin, Michele & Canova, Fabio, 2003. "Regional Policies and EU Enlargement," CEPR Discussion Papers 3744, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Nicola Fuchs-Schündeln & Rima Izem, 2007. "Explaining the Low Labor Productivity in East Germany. A Spatial Analysis," Kiel Working Papers 1307, Kiel Institute for the World Economy. [Downloadable!]
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