Journey into the Unknown? Economic Consequences of Factor Market Integration Under Increasing Returns to Scale

50 Pages Posted: 19 Dec 2011

See all articles by Andreas Schäfer

Andreas Schäfer

University of Leipzig/Institute for Theoretical Economics/Macroeconomics

Thomas Michael Steger

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2011

Abstract

What are the dynamic consequences of comprehensive integration shocks? The answer to this question appears all but trivial. 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. Hence, expectations matter for resulting equilibrium dynamics. Despite its simplicity, the model creates a rich set of plausible implications. Our analysis contributes to a better understanding of the interaction between expectations and fundamentals in models with indeterminacy. The model is applied to replicate two striking empirical characteristics of macroeconomic development in East Germany since 1991.

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

JEL Classification: E600, H200, O400

Suggested Citation

Schäfer, Andreas and Steger, Thomas Michael, Journey into the Unknown? Economic Consequences of Factor Market Integration Under Increasing Returns to Scale (December 19, 2011). CESifo Working Paper Series No. 3676, Available at SSRN: https://ssrn.com/abstract=1974406

Andreas Schäfer

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

Grimmaische Str. 12
D-04109 Leipzig, DE
Germany

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
28
Abstract Views
321
PlumX Metrics