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History, Expectations, and Public Policy: Economic Development in Eastern Germany

40 Pages Posted: 30 Sep 2010  

Andreas Schaefer

Center on Corporate Responsibility

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 29, 2010

Abstract

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.

Keywords: increasing returns to scale, capital mobility, migration, multiple equilibria, indeterminacy, history vs. expectations, economic policy

JEL Classification: E60, H20, O40

Suggested Citation

Schaefer, Andreas and Steger, Thomas Michael, History, Expectations, and Public Policy: Economic Development in Eastern Germany (September 29, 2010). CESifo Working Paper Series No. 3184. Available at SSRN: https://ssrn.com/abstract=1684441

Andreas Schaefer

Center on Corporate Responsibility ( email )

K├╝nstlergasse 15 a
Zurich, 8002
Switzerland

Thomas Michael Steger (Contact Author)

University of Leipzig/Institute for Theoretical Economics/Macroeconomics ( email )

Grimmaische Str. 12
D-04109 Leipzig
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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