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)| false ( Masson, Paul R., and Guy Meredith 1990b), “ Domestic and International Macroeconomic Consequences of German Unification,” Chapter VI of German Unification: Economic Issues. Leslie Lipschitz, and Donogh McDonald, eds., IMF Occasional Paper No. 75, December.
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Joseph Gagnon is Senior Economist at the Federal Reserve Board, and Warwick McKibbin is Professor of Economics at the Australia National University and nonresident senior fellow at the Brookings Institution. The paper is to be published in a special issue of Economic Modelling devoted to German unification.
We are grateful to Claire Adams for research assistance, to Tessa van der Willigen for supplying some of the data, and to Wilfried Jahnke, Russell Kincaid, Donogh McDonald, and Ellen Meade for helpful comments. This paper reflects the views of the authors and should not be interpreted as representing the views of the institutions with which the authors are affiliated.
The one-to-one conversion rate applied to a limited amount of monetary claims only--the average conversion rate for the banks’ balance sheets was about 1.8 to 1.
See Masson and Meredith (1990a, 1990b). The two studies differ in the following ways: the earlier, unpublished version used preliminary estimates of the size of transfers from West to East Germany that were smaller than those in the published paper by about one-quarter, while the simulation of a “European monetary policy” was removed from the published version.
Other significant differences between the two studies are that the later study assumed lower values for East German capital and technology and it allowed for persistent unemployment in East Germany as unions pressed to catch up to West German wage levels. These differences led to a modest quantitative--but no qualitative--change in the model simulations of key German macroeconomic variables.
An alternative simulation showed that the results for unified Germany were relatively insensitive to migration (1 million workers were assumed to migrate from East to West over a five-year period).
A scenario reported in Masson and Meredith (1990a) showed that targeting a European monetary aggregate produced smaller negative output effects for the other ERM countries.
Wyplosz (1991) made this argument in the context of a theoretical model. He also pointed out that a reduction in the German current account balance would lower net foreign assets in the long run relative to their position in the absence of unification, and that this should lead to a further depreciation of the real exchange rate. This net foreign asset mechanism is incorporated into all three sets of model simulations described here.
An alternative procedure to evaluate the simulations would be to recreate the baselines actually used in the simulations reported in section III. However, this has the disadvantage of requiring three different evaluations; moreover, since the models considered are, for most purposes, close to linear, the baseline used is irrelevant.
The 12-month inflation rate peaked considerably higher, as discussed above.