History, Expectations, and Public Policy: Economic Development in Eastern Germany
Center on Corporate Responsibility
Thomas Michael Steger
University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute)
September 29, 2010
CESifo Working Paper Series No. 3184
Motivated by the process of economic development in Eastern Germany since the German reunification we set up a dynamic macroeconomic model of a small open economy where both capital and labor are mobile and there are increasing returns to scale at the aggregate level. The model features multiple equilibria as well as (local and global) indeterminacy. Expectations matter for resulting equilibrium dynamics, implying that economic confidence may be crucial for the process of economic development. Despite its simplicity, the model can replicate major empirical facts and bears a number of non-trivial implications.
Number of Pages in PDF File: 40
Keywords: increasing returns to scale, capital mobility, migration, multiple equilibria, indeterminacy, history vs. expectations, economic policy
JEL Classification: E60, H20, O40
Date posted: September 30, 2010
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