Would it have paid to be in the eurozone? |
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| Institution: | 1. European Central Bank, Fiscal Policies Division, Sonnemannstr. 20, 60314, Frankfurt am Main, Germany;2. Asia School of Business, 2 Jalan Dato Onn, 50480, Kuala Lumpur, Malaysia;3. European Central Bank, Sonnemannstr. 20, 60314, Frankfurt am Main, Germany;4. University of Amsterdam (Amsterdam School of Economics) and Tinbergen Institute, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, the Netherlands;1. Larefi, Université Montesquieu-Bordeaux IV, bâtiment Recherche Economie — 1er étage, avenue Léon Duguit, 33608 Pessac, France;2. Laboratoire d''Economie d''Orléans (UMR 7322 CNRS), UFR Droit Economie Gestion, Université d''Orléans, Rue de Blois — BP 26739, 45067 Orléans Cedex 2, France |
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| Abstract: | Giving up an independent monetary policy and a flexible exchange rate are the key aspects of joining a monetary union. In this paper we analyse how joining the euro area would have affected the Polish business cycle during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking — volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between ? 6% and + 9% (? 9% to + 11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analysed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy. |
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