Macroeconomic Adjustment Analysis of the East German Economy

Abstract

When will productivity, capital stock and employment levels in eastern Germany have by and large adjusted to western levels? How would the speed of adjustment change if a more moderate wage policy was adopted? These are the two main questions the paper addresses. Given a productivity level in 1995 of still only 51 percent in eastern Germany, relative to western Germany in terms of GDP per capita, the first question will remain up to date for quite some years. But also the second question — addressing essentially the cost of the high-wage policy in terms of slower investment and lower employment — is still relevant since it might yield useful insights into the consequences of a shift towards a more moderate wage policy now.

Views expressed in this paper are those of the authors and not necessarily those of the International Monetary Fund. This work has been granted partly by the Deutsche Forschungsgemeinschaft, Schwerpunkt “Anwendungsbezogene Optimierung und Steuerung”, and by FORTWIHR, the Bayerischer Forschungsverbund für Technisch-Wissenschaftliches Hochleistungsrechnen.