IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

The Macroeconomic Costs and Benefits of Adopting the Euro

  • Philippe Karam
  • Douglas Laxton
  • David Rose
  • Natalia Tamirisa

This paper uses a two-country version of the global economy model to investigate some costs and benefits of a small, emerging economy's abandoning a flexible exchange rate regime in favor of adopting the currency of its main trading partner. The topic is particularly relevant for countries in central and eastern Europe, which recently joined the European Union and are now preparing to adopt the euro. We begin by evaluating macroeconomic performance in an inflation-targeting regime under various monetary policy rules. The results are then compared with the case where the small economy gives up its flexible exchange rate and joins the monetary union, under a number of alternative assumptions about the magnitude of shocks and structural rigidities. The analysis shows that although the monetary union has the benefit of eliminating exchange rate shocks, the loss of the buffering role of the exchange rate leads to greater volatility in domestic output and inflation. These costs are likely to decline over time, as markets become more competitive, flexible, and integrated in the monetary union. IMF Staff Papers (2008) 55, 339–355. doi:10.1057/imfsp.2008.9; published online 29 April 2008

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: Link to full text PDF
Download Restriction: Access to full text is restricted to subscribers.

File URL:
File Function: Link to full text HTML
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 55 (2008)
Issue (Month): 2 (June)
Pages: 339-355

in new window

Handle: RePEc:pal:imfstp:v:55:y:2008:i:2:p:339-355
Contact details of provider: Web page:

Order Information: Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
Web: Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pal:imfstp:v:55:y:2008:i:2:p:339-355. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Daniel Foley)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.