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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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