Welfare Effects of the Euro Cash Changeover
AbstractUsing 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2508.
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
Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Other versions of this item:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-02 (All new papers)
- NEP-CBA-2007-01-02 (Central Banking)
- NEP-EEC-2007-01-02 (European Economics)
- NEP-MAC-2007-01-02 (Macroeconomics)
- NEP-MON-2007-01-02 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard Blundell & Monica Costa Dias, 2002.
"Alternative approaches to evaluation in empirical microeconomics,"
CeMMAP working papers
CWP10/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Richard Blundell & Monica Costa Dias, 2009. "Alternative Approaches to Evaluation in Empirical Microeconomics," Journal of Human Resources, University of Wisconsin Press, vol. 44(3).
- Richard Blundell & Monica Costa Dias, 2008. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers CWP26/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Richard Blundell & Mónica Costa Dias, 2008. "Alternative Approaches to Evaluation in Empirical Microeconomics," CEF.UP Working Papers 0805, Universidade do Porto, Faculdade de Economia do Porto.
- Blundell, Richard & Costa Dias, Monica, 2008. "Alternative Approaches to Evaluation in Empirical Microeconomics," IZA Discussion Papers 3800, Institute for the Study of Labor (IZA).
- Frey, Bruno S & Stutzer, Alois, 2000.
"Happiness, Economy and Institutions,"
Royal Economic Society, vol. 110(466), pages 918-38, October.
- Manfred Fluch & Helmut Stix, 2005. "Perceived Inflation in Austria – Extent, Explanations, Effects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 22â47.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Brandstatter, Eduard & Brandstatter, Hermann, 1996. "What's money worth? Determinants of the subjective value of money," Journal of Economic Psychology, Elsevier, vol. 17(4), pages 443-464, August.
- Jeffrey Smith & Petra Todd, 2003.
"Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?,"
University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers
20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
- A. Smith, Jeffrey & E. Todd, Petra, 2005. "Does matching overcome LaLonde's critique of nonexperimental estimators?," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 305-353.
- Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
- Bruno S. Frey & Alois Stutzer, 2002.
"What Can Economists Learn from Happiness Research?,"
Journal of Economic Literature,
American Economic Association, vol. 40(2), pages 402-435, June.
- Bruno S. Frey & Alois Stutzer, 2001. "What Can Economists Learn from Happiness Research?," CESifo Working Paper Series 503, CESifo Group Munich.
- Bruno S. Frey & Alois Stutzer, . "What can Economists Learn from Happiness Research?," IEW - Working Papers 080, Institute for Empirical Research in Economics - University of Zurich.
- Michael N. Mitchell & Xiao Chen, 2005. "Visualizing main effects and interactions for binary logit models," Stata Journal, StataCorp LP, vol. 5(1), pages 64-82, March.
- Annette Bergemann & Bernd Fitzenberger & Stefan Speckesser, 2009.
"Evaluating the dynamic employment effects of training programs in East Germany using conditional difference-in-differences,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 24(5), pages 797-823.
- Bergemann, Annette & Fitzenberger, Bernd & Speckesser, Stefan, 2005. "Evaluating the Dynamic Employment Effects of Training Programs in East Germany Using Conditional Difference-in-Differences," IZA Discussion Papers 1848, Institute for the Study of Labor (IZA).
- Speckesser, Stefan & Fitzenberger, Bernd & Bergemann, Annette, 2004. "Evaluating the Dynamic Employment Effects of Training Programs in East Germany Using Conditional Difference-in-Differences," ZEW Discussion Papers 04-41, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
- Johannes Schwarze, 2003. "Using Panel Data on Income Satisfaction to Estimate Equivalence Scale Elasticity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(3), pages 359-372, 09.
- Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May.
- Edward C. Norton & Hua Wang & Chunrong Ai, 2004. "Computing interaction effects and standard errors in logit and probit models," Stata Journal, StataCorp LP, vol. 4(2), pages 154-167, June.
- Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998.
"Characterizing Selection Bias Using Experimental Data,"
NBER Working Papers
6699, National Bureau of Economic Research, Inc.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," Econometrica, Econometric Society, vol. 66(5), pages 1017-1098, September.
- Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
- Brachinger, Hans Wolfgang, 2006. "Euro or “Teuro”?: The Euro-induced Perceived Inflation in Germany," DQE Working Papers 5, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland.
- Bettina Isengard & Thorsten Schneider, 2007. "Attitudes Towards The Euro: An Empirical Study Based On The German Socio-Economic Panel (Soep)," Social Indicators Research, Springer, vol. 82(1), pages 35-56, May.
- Edwin Leuven & Barbara Sianesi, 2003. "PSMATCH2: Stata module to perform full Mahalanobis and propensity score matching, common support graphing, and covariate imbalance testing," Statistical Software Components S432001, Boston College Department of Economics, revised 12 Feb 2014.
- Thomas A. Eife & W. Timothy Coombs, 2006.
"Coping with People’s Inflation Perceptions During a Currency Changeover,"
0435, University of Heidelberg, Department of Economics, revised Dec 2006.
- 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.
- Thomas A. Eife & Stephan Meier, 2007. "Costly Inflation Misperceptions," Working Papers 0455, University of Heidelberg, Department of Economics, revised Oct 2007.
- Lagadec, Gael & Descombels, Alain, 2009.
"L'ombre de la crise
[The shadow of the global crisis]," MPRA Paper 17871, University Library of Munich, Germany.
- 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).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.