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Welfare implications of joining a common currency

  • Ca' Zorzi, Michele
  • De Santis, Roberto A.
  • Zampolli, Fabrizio

This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks. JEL Classification: E52, E58, F33, F40

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Paper provided by European Central Bank in its series Working Paper Series with number 0445.

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Date of creation: Feb 2005
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Handle: RePEc:ecb:ecbwps:20050445
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  1. Cukierman, A. & Lippi, F., 1999. "Labor markets and Monetary Union : A Strategic Analysis," Discussion Paper 1999-100, Tilburg University, Center for Economic Research.
  2. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
  3. Russell Cooper & Hubert Kempf, 2000. "Designing stabilization policy in a monetary union," Working Paper 0001, Federal Reserve Bank of Cleveland.
  4. Bergin, Paul R., 2003. "A model of relative national price levels under pricing to market," European Economic Review, Elsevier, vol. 47(3), pages 569-586, June.
  5. repec:rus:hseeco:123846 is not listed on IDEAS
  6. Michele Ca' Zorzi & Roberto A. De Santis, 2004. "The Eastward Enlargement of the European Monetary Union," EUI-RSCAS Working Papers 31, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  7. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  8. Ca' Zorzi, Michele & De Santis, Roberto A., 2004. "Currency unions and the real exchange rate," Economics Letters, Elsevier, vol. 85(1), pages 23-27, October.
  9. Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2004. "The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1053-1080.
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