Investment and Employment Adjustment after Unification: Some Results from a Macroeconometric Disequilibrium Model

AbstractThe macroeconomic development in West Germany in the aftermath of unification was characterized by a boom period in 1990/1991, a deep recession in 1992/1993 and a slow recovery since then. In East Germany, in contrast, unification induced a breakdown of production and employment followed by a slow recovery in 1992.In this paper, a macroeconomic model is used to assess this development. In particular, estimation results for investment and employment adjustment after unification are reported. The estimates are based on a disequilibrium model formerly developed for West Germany and extended in this paper to cover also unified Germany.The results reveal that the adjustment of investment and employment can be analysed with the same theoretical model for East and West Germany. However, the adjustment speed for investment differs significantly at least in the early years after unification, while changes in the mismatch on the labour market and employment adjustment are less pronounced.

Radowski, Daniel, Werner Smolny and Peter Winker (1999), Investment and Employment Adjustment after Unification: Some Results from a Macroeconometric Disequilibrium Model, ZEW Discussion Paper No. 99-56, Mannheim.