Abstract:
This study reports on early simulations of the effects of German unification using three different
rational-expectations multi-country models. Despite significant differences in their structures
and in the implementations of the unification shock, the models delivered a number of common results
that proved to be a reasonably accurate guide to the direction and magnitude of the effects of
unification on most key macroeconomic variables. In particular, unification was expected to give rise
to an increase in German aggregate demand that would put upward pressure on output, inflation, and
the exchange rate, and downward pressure on the current account balance in Germany. The model
simulations also highlighted the contractionary effects of high German interest rates on other member
countries of the Exchange Rate Mechanism of the European Monetary System.
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