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Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model

Author

Listed:
  • Jan Bruha
  • Jaromir Tonner

Abstract

The goal of this paper is to contribute to the understanding of the macroeconomic costs and benefits of euro adoption by the Czech economy through the lens of the CNB's official structural macroeconomic model - called g3. To do so, we perform simulations using the g3 model and a modification thereof with a fixed nominal exchange rate and with the policy rate given by the ECB. First, we compare the unconditional volatilities of selected macro variables implied by the two models. Second, we use the g3 model to filter the historical data to identify the structural shocks that affected the Czech economy in the past ten years, and we then use the modified model to simulate the counterfactual outcome of what would have happened to the Czech economy if the euro had been adopted in the past. Our results indicate that euro adoption would have had positive effects on the levels of macroeconomic variables at the cost of an increase in nominal volatility.

Suggested Citation

  • Jan Bruha & Jaromir Tonner, 2018. "Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model," Working Papers 2018/19, Czech National Bank.
  • Handle: RePEc:cnb:wpaper:2018/19
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2018_19.pdf
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    References listed on IDEAS

    as
    1. Andrew K. Rose, 2017. "Why do Estimates of the EMU Effect on Trade Vary so Much?," Open Economies Review, Springer, vol. 28(1), pages 1-18, February.
    2. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
    3. Ferreira-Lopes, Alexandra, 2010. "In or out? The welfare costs of EMU membership," Economic Modelling, Elsevier, vol. 27(2), pages 585-594, March.
    4. Alexandra Ferreira-Lopes, 2014. "The Welfare Cost of the EMU for Transition Countries," Prague Economic Papers, University of Economics, Prague, vol. 2014(4), pages 446-473.
    5. 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.
    6. repec:eee:ecosys:v:42:y:2018:i:4:p:584-596 is not listed on IDEAS
    7. Jan Bruha & Jaromir Tonner, 2018. "An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-Post Assessment of the Czech Experience," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 537-549, December.
    8. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
    9. Frantisek Brazdik & Jan Bruha & Michal Franta & David Havrlant & Tibor Hledik & Tomas Holub & Zuzana Humplova & Frantisek Kopriva & Jiri Polansky & Marek Rusnak & Jaromir Tonner, 2015. "Forecasting," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 13, number rb13/1 edited by Jan Babecky & Kamil Galuscak.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    DSGE model; euro; monetary policy;

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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