Economic Structure, the Exchange Rate, and Adjustment in the Federal Republic of Germany: A General Equilibrium Approach

The effects of an appreciation of the deutsche mark are traced with the help of a computable general equilibrium model under alternative structural policy scenarios. In the first scenario, characterized by severe structural rigidities, the contractionary effects of exchange rate appreciation dominate the expansionary effects, so that gross domestic product and employment fall and the external surplus declines only slightly. In the alternative case of free movement of goods, services, and factors, the expansionary effects of the appreciation become more prominent as supply and demand respond much more readily to the relative price changes.