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Can we prevent boom-bust cycles during euro area accession?

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  • Brzoza-Brzezina, Michał
  • Jacquinot, Pascal
  • Kolasa, Marcin

Abstract

Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. JEL Classification: E52, E58, E63

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1280.

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Date of creation: Dec 2010
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Handle: RePEc:ecb:ecbwps:20101280

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Keywords: Boom-bust cycles; dynamic general equilibrium models; euro area accession;

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Cited by:
  1. A team of the Working Group on Econometric Modelling of the European System of Central Banks, 2012. "Competitiveness and external imbalances within the euro area," Occasional Paper Series 139, European Central Bank.
  2. Matus Senaj & Milan Vyskrabka, 2011. "European Taxes in a Laboratory," Working and Discussion Papers WP 2/2011, Research Department, National Bank of Slovakia.
  3. Agnieszka Stążka-Gawrysiak, 2011. "Poland on the road to the euro: How serious is the risk of boom-bust cycles after the euro adoption? An empirical analysis," National Bank of Poland Working Papers 103, National Bank of Poland, Economic Institute.

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