IDEAS home Printed from https://ideas.repec.org/a/pal/imfstp/v55y2008i2p339-355.html
   My bibliography  Save this article

The Macroeconomic Costs and Benefits of Adopting the Euro

Author

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

Abstract

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

Suggested Citation

  • Philippe Karam & Douglas Laxton & David Rose & Natalia Tamirisa, 2008. "The Macroeconomic Costs and Benefits of Adopting the Euro," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 339-355, June.
  • Handle: RePEc:pal:imfstp:v:55:y:2008:i:2:p:339-355
    as

    Download full text from publisher

    File URL: http://www.palgrave-journals.com/imfsp/journal/v55/n2/pdf/imfsp20089a.pdf
    File Function: Link to full text PDF
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: http://www.palgrave-journals.com/imfsp/journal/v55/n2/full/imfsp20089a.html
    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 search for a different version of it.

    References listed on IDEAS

    as
    1. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," Research Department Publications 4339, Inter-American Development Bank, Research Department.
    2. Hamid Faruqee, 2004. "Measuring the Trade Effects of EMU," IMF Working Papers 04/154, International Monetary Fund.
    3. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    4. Bayoumi, Tamim & Laxton, Douglas & Pesenti, Paolo, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," Working Paper Series 341, European Central Bank.
    5. Alejandro Micco & Ernesto Stein & Guillermo Ordoñez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
    6. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
    7. Clark, Peter & Laxton, Douglas & Rose, David, 2001. "An Evaluation of Alternative Monetary Policy Rules in a Model with Capacity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 42-64, February.
    8. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate of the Effect of Common Currencies on Trade and Income," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 437-466.
    9. Tamim Bayoumi & Hamid Faruqee & Douglas Laxton & Philippe D Karam & Alessandro Rebucci & Jaewoo Lee & Benjamin L Hunt & Ivan Tchakarov, 2004. "GEM; A New International Macroeconomic Model," IMF Occasional Papers 239, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Melecky, Ales & Melecky, Martin, 2008. "From Inflation to Exchange Rate Targeting: Estimating the Stabilization Effects," MPRA Paper 10844, University Library of Munich, Germany.
    2. Kolasa, Marcin, 2014. "Real convergence and its illusions," Economic Modelling, Elsevier, vol. 37(C), pages 79-88.
    3. Krzysztof MAKARSKI & Michal GRADZEWICZ, "undated". "The Macroeconomic Effects of Losing Autonomous Monetary Policy after the Euro Adoption in Poland," EcoMod2009 21500061, EcoMod.
    4. Fischer, Justina A.V. & Pastore, Francesco, 2015. "Completing the Monetary Union of Europe as Mid-term Solution of the Euro Crisis," IZA Discussion Papers 9230, Institute for the Study of Labor (IZA).
    5. Melecky, Ales & Melecky, Martin, 2010. "From inflation to exchange rate targeting: Estimating the stabilization effects for a small open economy," Economic Systems, Elsevier, vol. 34(4), pages 450-468, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.palgrave-journals.com/ .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.