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Would it have paid to be in the eurozone?

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  • Michal Brzoza-Brzezina

    ()
    (National Bank of Poland, Warsaw School of Economics)

  • Krzysztof Makarski

    ()
    (National Bank of Poland, Warsaw School of Economics)

  • Grzegorz Wesolowski

    ()
    (National Bank of Poland, Warsaw School of Economics)

Abstract

Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy.

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Bibliographic Info

Paper provided by Department of Applied Econometrics, Warsaw School of Economics in its series Working Papers with number 70.

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Length: 32
Date of creation: 23 Oct 2013
Date of revision:
Handle: RePEc:wse:wpaper:70

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Keywords: optimum currency area; euro-area accession; emerging market;

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  1. Brzoza-Brzezina, Michał & Makarski, Krzysztof, 2011. "Credit crunch in a small open economy," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1406-1428.
  2. Michał Gradzewicz & Krzysztof Makarski, 2013. "The business cycle implications of the euro adoption in Poland," Applied Economics, Taylor & Francis Journals, vol. 45(17), pages 2443-2455, June.
  3. Kolasa, Marcin, 2009. "Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model," Economic Modelling, Elsevier, vol. 26(6), pages 1245-1269, November.
  4. Christoffel, Kai & Coenen, Günter & Warne, Anders, 2008. "The New Area-Wide Model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 0944, European Central Bank.
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Cited by:
  1. Andrzej Torój & Karolina Konopczak, 2012. "Crisis Resistance Versus Monetary Regime: A Polish–Slovak Counterfactual Exercise," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 4(1), pages 1-22, March.

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