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Re-Evaluating Swedish Membership in EMU: Evidence from an Estimated Model

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  • Söderström, Ulf

    ()
    (Research Department, Central Bank of Sweden)

Abstract

I revisit the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. I first show that the Swedish business cycle since the mid-1990s has been closely correlated with the Euro area economies, suggesting that common shocks have been an important driving force of business cycles in Europe. However, evidence from an estimated model of the Swedish economy instead suggests that country specific shocks have been important for fluctuations in the Swedish economy since 1993, implying that EMU membership could be costly. The model also indicates that the exchange rate has to a large extent acted to destabilize, rather than stabilize, the Swedish economy, pointing to the costs of independent monetary policy with a flexible exchange rate. Finally, counterfactual simulations of the model suggest that Swedish in inflation and GDP growth might have been slightly higher if Sweden had been a member of EMU since the launch in 1999, but also that GDP growth might have been more volatile. The evidence is therefore not conclusive about whether or not participation in the monetary union would be advantageous for Sweden.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 227.

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Length: 50 pages
Date of creation: 01 Dec 2008
Date of revision:
Handle: RePEc:hhs:rbnkwp:0227

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Monetary union; Open economy; Optimum Currency Area; DSGE model.;

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Cited by:
  1. J James Reade & Ulrich Volz, 2010. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Discussion Papers, Department of Economics, University of Birmingham 10-13, Department of Economics, University of Birmingham.
  2. Herbert S. Buscher & Hubert Gabrisch, 2011. "What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK," IWH Discussion Papers, Halle Institute for Economic Research 9, Halle Institute for Economic Research.
  3. Riccardo DiCecio & Edward Nelson, 2010. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," NBER Chapters, National Bureau of Economic Research, Inc, in: Europe and the Euro, pages 415-439 National Bureau of Economic Research, Inc.
  4. Carlo A. Favero, 2010. "Comment on "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model"," NBER Chapters, National Bureau of Economic Research, Inc, in: Europe and the Euro, pages 440-445 National Bureau of Economic Research, Inc.
  5. Amisano, Gianni & Giammarioli, Nicola & Stracca, Livio, 2009. "EMU and the adjustment to asymmetric shocks: the case of Italy," Working Paper Series, European Central Bank 1128, European Central Bank.

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