Welfare implications of joining a common currency

Ca’ Zorzi, Michele (), Roberto A. De Santis () and Fabrizio Zampolli
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Ca’ Zorzi, Michele: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html
Authors registered in the RePEc Author Service: Michele Ca' Zorzi

No 445, Working Paper Series from European Central Bank

Abstract: This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks.

Keywords: Balassa-Samuelson Effect; Currency Union; Monetary Policy; Welfare. (search for similar items in EconPapers)
JEL-codes: E52 E58 F33 F40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
Date: 2005-02
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