International Spillovers and Feedback: Modelling in a Disequilibrium Framework

German unification hit the West German economy in a prosperous period and appeared as a huge demand shock at least for the first few quarters. This combination resulted in a major increase of imports from the main trading partners of West Germany, which may have helped to cushion recessionary trends within these countries.In this paper the modelling of international trade in a disequilibrium framework and the consequences of German unification on trade flows are in the centre of interest. For this purpose, a macroeconometric disequilibrium model for the German economy is extended by submodels for bilateral trade flows vis a vis major trading partners. These submodels treat the trade flows as well as foreign and domestic production and capacity utilization as endogenous in a vector error correction framework. Consequently, the model allows for spillovers, like those resulting from the demand shock of German unification, to effect not only German trade flows, but also real variables on other countries leading to a feedback on Germany. The paper provides a short overview over the basic model. The modelling approach and estimation results for the trade submodels are presented in some detail and simulation results for the feedback effects are also included.

Winker, Peter and Martin Beck (2000), International Spillovers and Feedback: Modelling in a Disequilibrium Framework, ZEW Discussion Paper No. 00-36, Mannheim.