Paper #442

Title:

The macroeconomic effects of German unification: Real adjustments and the welfare state

Authors:

Fabio Canova and Morten O. Ravn

Date:

March 2000

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.

Keywords:

Unification, redistribution, tax distortions, welfare

JEL codes:

B41, E32

Area of Research:

Macroeconomics and International Economics

Published in:

Review of Economic Dynamics, 2000, 3(3), pp. 423-460

Download the paper in PDF format