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Growth and Convergence in a Two‐Region Model of Unified Germany

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  • Frank Siebern

Abstract

The paper sets up a two‐region endogenous growth model to discuss growth and regional convergence of unified Germany. It emphasizes the role of private and public capital accumulation during the developing process. The theoretical part derives fiscal policy rules which establish convergence of regional output per capita and convergence of regional human wealth. To assess the speed of convergence the model is calibrated with German data. Given a fiscal policy rule that is consistent with the data on government spending in East and West Germany after unification the model suggests that East Germany will reach 80 per cent of West Germany’s income per capita between 20 and 30 years after unification and that actual transfers are approximately sufficient to equalize regional human wealth. The results are compared with an extension of the model that includes wage‐setting behaviour and unemployment in the eastern region.

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  • Frank Siebern, 2000. "Growth and Convergence in a Two‐Region Model of Unified Germany," German Economic Review, Verein für Socialpolitik, vol. 1(3), pages 363-384, August.
    • Handle: RePEc:bla:germec:v:1:y:2000:i:3:p:363-384
    DOI: 10.1111/1468-0475.00018
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    Cited by:

    1. Michael Funke & Jörg Rahn, 2002. "How efficient is the East German economy? An exploration with microdata," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(1), pages 201-223.
    2. Funke, Michael & Strulik, Holger, 2005. "Growth and convergence in a two-region model: The hypothetical case of Korean unification," Journal of Asian Economics, Elsevier, vol. 16(2), pages 255-279, April.
    3. Kilin F.S., 2003. "Analysis of convergence process of East German economy on the base of a two-region growth model," GE, Growth, Math methods 0304002, University Library of Munich, Germany.
    4. Claro, Sebastian, 2006. "Supporting inefficient firms with capital subsidies: China and Germany in the 1990s," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 377-401, June.
    5. Falko Juessen, 2009. "A distribution dynamics approach to regional GDP convergence in unified Germany," Empirical Economics, Springer, vol. 37(3), pages 627-652, December.
    6. Bernd Aumann & Rolf Scheufele, 2010. "Is East Germany catching up? A time series perspective," Post-Communist Economies, Taylor & Francis Journals, vol. 22(2), pages 177-192.
    7. Falko Juessen, 2005. "A distribution dynamics approach to regional income convergence in reunified Germany," ERSA conference papers ersa05p411, European Regional Science Association.

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