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Welfare Effects of the Euro Cash Changeover

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Author Info
Christoph Wunder () (University of Bamberg)
Johannes Schwarze () (University of Bamberg, DIW Berlin and IZA Bonn)
Gerhard Krug () (Institute for Employment Research (IAB))
Bodo Herzog () (German Council of Economic Experts)

Additional information is available for the following registered author(s):

Abstract

Using merged data from the British Household Panel Survey (BHPS) and the German Socio- Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2508.

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Length: 35 pages
Date of creation: Dec 2006
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Handle: RePEc:iza:izadps:dp2508

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Related research
Keywords: subjective well-being euro cash changeover perceived inflation difference-in-differences

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare

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References listed on IDEAS
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Cited by:
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  1. Thomas A. Eife & W. Timothy Coombs, 2007. "Coping with People's Inflation Perceptions during a Currency Changeover," Working Papers 0458, University of Heidelberg, Department of Economics, revised Nov 2007. [Downloadable!]
    Other versions:
  2. Thomas A. Eife & Stephan Meier, 2007. "Costly Inflation Misperceptions," Working Papers 0455, University of Heidelberg, Department of Economics, revised Oct 2007. [Downloadable!]
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