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Welfare Effects of the Euro Cash Changeover

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Author Info

  • Wunder, Christoph

    ()
    (University of Erlangen-Nuremberg)

  • Schwarze, Johannes

    (University of Bamberg)

  • Krug, Gerhard

    ()
    (Institute for Employment Research (IAB), Nuremberg)

  • Herzog, Bodo

    ()
    (ESB Reutlingen)

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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Bibliographic Info

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
Date of revision:
Publication status: published in: European Journal of Political Economy, 2008, 24 (3), 571-586
Handle: RePEc:iza:izadps:dp2508

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Related research

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

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References

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Citations

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Cited by:
  1. Thomas A. Eife & Stephan Meier, 2007. "Costly Inflation Misperceptions," Working Papers 0455, University of Heidelberg, Department of Economics, revised Oct 2007.
  2. 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.
  3. Sara Bleninger, 2013. "Welfare Effects of the Euro Cash Changeover: Do Assumptions Really Matter?," SOEPpapers on Multidisciplinary Panel Data Research 577, DIW Berlin, The German Socio-Economic Panel (SOEP).
  4. Lagadec, Gael & Descombels, Alain, 2009. "L'ombre de la crise
    [The shadow of the global crisis]
    ," MPRA Paper 17871, University Library of Munich, Germany.

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