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A Note On the Real Exchange Rate Effect on German Unification

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  • Wyplosz, C.

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.
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Suggested Citation

  • Wyplosz, C., 1991. "A Note On the Real Exchange Rate Effect on German Unification," DELTA Working Papers 91-06, DELTA (Ecole normale supérieure).
    • Handle: RePEc:del:abcdef:91-06
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    Cited by:

    1. Siebert, Horst, 1991. "German unification: the economics of transition," Kiel Working Papers 468, Kiel Institute for the World Economy (IfW Kiel).
    2. Siebert, Horst, 1992. "Real adjustment in the transformation process: Risk factors in East Germany," Open Access Publications from Kiel Institute for the World Economy 1915, Kiel Institute for the World Economy (IfW Kiel).
    3. Hefeker, Carsten, 1994. "GMU, EMU, and the Bundesbank: The political economy of recent EMS-crises," Discussion Papers, Series II 221, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    4. Sinn, Hans-Werner, 1996. "International Implications of German Unification," CEPR Discussion Papers 1508, C.E.P.R. Discussion Papers.
    5. Joseph E. Gagnon & Paul R. Masson & Warwick J. McKibbin, 2019. "German Unification: What Have We Learned from Multi-Country Models?," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 4, pages 101-140, World Scientific Publishing Co. Pte. Ltd..
    6. Siebert, Horst, 1992. "Five traps for German economic policy," Kiel Discussion Papers 185, Kiel Institute for the World Economy (IfW Kiel).
    7. Patrick Artus, 1992. "Réunification allemande, dynamique et contraintes. Un cadre d'analyse," Revue Économique, Programme National Persée, vol. 43(5), pages 823-850.

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