GERMAN UNIFICATION - WHAT HAVE WE LEARNED FROM MULTICOUNTRY MODELS

This study reviews early simulations of the effects of German unificat ion using three different rational expectations multi-country models. Despite significant differences in their structures and in the impleme ntations of the unification shock, the models delivered a number of co mmon results that proved reasonably accurate guides to the direction a nd magnitude of the effects of unification on key macroeconomic variab les. Unification was expected to give rise to an increase in German ag gregate demand that would put upward pressure on output, inflation, an d the exchange rate, and downward pressure on the current account bala nce. The model simulations also highlighted contractionary effects of high German interest rates on EMS countries.