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The Costs to Consumers of a Depreciated Conversion Rate to the Euro

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  • Marques, Luis B

Abstract

This paper measures the welfare cost to consumers of the bloc of Central and Eastern European Countries (CEEC), plus Malta and Cyprus, of choosing a de- preciated conversion rate when joining the European Monetary Union. For this, I present and solve an appropriately calibrated small open economy model where a euro-denominated bond and the equity on a traded goods sector are traded internationally. I show that the cost of depreciating the domestic currency against the euro by 20%, at the time of joining the European Monetary Union, entails a cost of approximately 1.65% in terms of lost lifetime utility (measured in equivalent units of consumption).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5723.

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Date of creation: Aug 2007
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Handle: RePEc:pra:mprapa:5723

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Keywords: trade effect; valuation effect; wealth effect; exchange rate;

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  17. João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers, Katholieke Universiteit Leuven, Centrum voor Economische Studiën ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  18. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 53(1), pages 239-296, December.
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