International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 4

After running high current account surpluses in the second half of the 1980s, Germany ran sizable deficits in the early 1990s. The most important reason for the current account deficit was the surge in demand from eastern Germany after reunification, causing imports to rise sharply. At the same time, Germany went from being a net creditor country to being a net debtor. Explain why this is a logical implication of the current account deficits. Interest rates in Germany were historically high during this period. Why might that have been the case Could East Germany have been developed without running a current account deficit How