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Would it have paid to be in the eurozone?

Michal Brzoza-Brzezina, Krzysztof Makarski () and Grzegorz Wesołowski

No 70, Working Papers from Department of Applied Econometrics, Warsaw School of Economics

Abstract: Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy 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 analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy.

Keywords: optimum currency area; euro-area accession; emerging market (search for similar items in EconPapers)
JEL-codes: E32 E58 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-eec, nep-mac, nep-mon and nep-tra
Date: 2013-10-23
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http://kolegia.sgh.waw.pl/pl/KAE/struktura/IE/stru ... Papers/aewp04-13.pdf

Related works:
Journal Article: Would it have paid to be in the eurozone? (2014) Downloads
Working Paper: Would it have paid to be in the eurozone? (2012) Downloads
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