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A Note on the real exchange rate effect of German unification

Author: Wyplosz, Charles INSEAD Area: Economics and Political Science Series: Working Paper ; 90/65/EPS Publisher: Fontainebleau : INSEAD, 1990.Language: EnglishDescription: 17 p.Type of document: INSEAD Working Paper Online Access: Click here 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 demand side. In this note, it is shown that supply side considerations imply a permanent fall in per capita wealth in Germany. This implies a long real depreciation, mirroring partly a worsened net asset position (as Germany borrows abroad to finance capital accumulation), and partly increased output of German goods. 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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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 demand side. In this note, it is shown that supply side considerations imply a permanent fall in per capita wealth in Germany. This implies a long real depreciation, mirroring partly a worsened net asset position (as Germany borrows abroad to finance capital accumulation), and partly increased output of German goods. 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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