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Estonia and the European Monetary Union – Are there Benefits from a ""Late"" Accession?

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  • Baas, Timo

Abstract

The failure of the Maastricht criteria delayed Estonia's accession to the European Monetary Union (EMU) until January 2011. During this time, trading shares with Eurozone countries declined, raising questions about the optimal accession time. In this study, the macroeconomic effects of introducing a common currency are analyzed by considering the state of the economy in different years of accession. By accounting for currency conversion costs and in-house costs, we show that the trade effects of the EMU depend on the year of accession. In summary, a 'late' accession induces higher benefits in terms of an increase in GDP, private consumption, and investment. However, the additional investment demand for building up capital stock in export industries is much higher in the 'late' accession scenario. If foreign savings are not adjusted optimally, the 'early' accession scenario might be beneficial.

Suggested Citation

  • Baas, Timo, 2014. "Estonia and the European Monetary Union – Are there Benefits from a ""Late"" Accession?," Ruhr Economic Papers 489, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:489
    DOI: 10.4419/86788558
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    References listed on IDEAS

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    1. Richard Baldwin & Virginia Dinino & Lionel Fontagné & Roberto Desantis & Daria Taglioni, 2008. "Study on the Impact of the Euro on Trade and Investment," Post-Print hal-00639943, HAL.
    2. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 446, European Central Bank.
    3. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
    4. Maurice J. G. Bun & Franc J. G. M. Klaassen, 2007. "The Euro Effect on Trade is not as Large as Commonly Thought," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(4), pages 473-496, August.
    5. Richard Baldwin & Virginia DiNino & Lionel Fontagné & Roberto A. De Santis & Daria Taglioni, 2008. "Study on the Impact of the Euro on Trade and Foreign Direct Investment," European Economy - Economic Papers 2008 - 2015 321, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    Cited by:

    1. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    Eurozone; optimum currency areas; international trade; computable equilibrium model;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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