Romania’s accession to the Eurozone – a simulation using a simple DSGE model

In this paper we present a simulation where Romania is a member of the Economic and Monetary Union (EMU); for this purpose we make use of a simple twocountry Dynamic Stochastic General Equilibrium (DSGE) model linking Romania to the Eurozone. This research is motivated by the perspective of Romania entering in the EMU and by the poor research about the structural differences between these two economies and, also, about the macroeconomic effects of Euro area accession. In the first part we present the difference between the parameters describing the agent’s decision-making in Romania and Euro area. The estimation showed that there is a degree of heterogeneity between the structural parameters describing the agents’ behaviour, but a larger degree of heterogeneity can be observed at the volatility and at the synchronization of the structural shocks; the shocks that are hitting the Romanian economy are more volatile than those that affect the Eurozone. Because we have a micro-founded analysis of both economies, we can easily analyse the impact of losing monetary policy autonomy. In the absence of autonomous monetary policy, the most important stabilizer for a newly entered economy in the EMU is the competitiveness channel. To assess the importance of the competitiveness channel, the impulse response functions before and after Romania entry in the EMU are plotted. The simulation showed that the autonomous monetary policy plays an important role in stabilizing the Romanian economy after an internal originated shock and, thus, the competitiveness channel isn’t able to stabilize the economy in a reasonable period; the inflation and the output are in general more volatile in the case where Romania is a member of the EMU.