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Adopting the Euro will Cause an Increase in Prices: A Study on Inflationary Processes in Euro Area Member States

Piotr Nowaczyk and Joanna Hernik

European Research Studies Journal, 2020, vol. XXIII, issue 4, 377-403

Abstract: Purpose: The main purpose of the article is to identify factors that may affect the course of inflation processes in Poland after the adoption of the single European currency. Design/Methodology/Approach: The mechanism triggering an inflationary spiral in the first years after the adoption of the euro was especially visible in Spain, which became the subject of comparative analysis. Based on literature, it was determined that the price increase in Spain resulted from an asymmetric demand shock. Its sources should be sought in Spain's adoption of a lower interest rate and in the structural features of the country’s economy. Similarly, Poland’s submission to the single monetary policy regime imposed by the European Central Bank may affect the course of inflationary processes. This study made use of the document analysis, comparative analysis, and statistical analysis methods. Findings: Factors that may affect inflation processes in Poland after the adoption of the single currency will be the adoption of a lower interest rate, and expansionary fiscal policy. Lending policy and inflation expectations will be less likely to stimulate price increases. These factors may contribute to the occurrence of asymmetric shock, i.e. surplus of global demand over supply. Reduction of the inflation risk will require a tightening of lending and fiscal policy. Otherwise, the Polish economy will be exposed to the occurrence of crises. Practical Implications: Reflections on the importance of the single European currency in the course of inflation processes can be a valuable source of information for decision makers in preventing crisis phenomena. The more so because six Central and Eastern European countries have committed themselves in the Accession Treaties to the introduction of the euro and will face similar dilemmas. Originality/Value: The authors of this article draw attention to the importance of domestic factors in correcting inflation processes in the event of the loss of independence of national monetary policy.

Keywords: Inflation; Spain; EMU; European currency; asymmetric shocks; monetary policy. (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 F33 H62 (search for similar items in EconPapers)
Date: 2020
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Handle: RePEc:ers:journl:v:xxiii:y:2020:i:4:p:377-403