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The Costs of EMU for Transition Countries

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  • Alexandra Ferreira Lopes

    (ISEG, ISCTE and DINÂ MIA)

Abstract

Czech Republic, Hungary and Poland will have to join the European and Monetary Union. Surprisingly, there is very little work on the welfare consequences of the loss of monetary policy flexibility for these countries. This paper fills this void by providing a framework to evaluate quantitatively the economic costs of joining the EMU. Using a two country dynamic general equilibrium model with sticky prices we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each country. The main contribution of our general equilibrium approach is that we can evaluate the effects of monetary policy in terms of welfare. Our findings suggest that these economies may experience sizable welfare losses as a result of joining the EMU. Results show that the cost associated with the loss of the monetary policy flexibility is bigger in the presence of persistence technological shocks, weak correlation of monetary shocks, strong risk aversion and a small trade share with the EMU

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 2.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:2

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Keywords: Monetary Policy; Eastern and Central Europe Countries; Euro; Open Economy Macroeconomics; General Equilibrium;

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Cited by:
  1. Lipinska, Anna, 2006. "The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries," MPRA Paper 1795, University Library of Munich, Germany.
  2. Lipinska, Anna, 2008. "The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries," MPRA Paper 16376, University Library of Munich, Germany.
  3. Michał Gradzewicz & Krzysztof Makarski, 2009. "The Macroeconomic Effects of Losing Autonomous Monetary Policy after the Euro Adoption in Poland," National Bank of Poland Working Papers 58, National Bank of Poland, Economic Institute.

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