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Welfare Effects of the Euro Cash Changeover

Author

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  • Wunder, Christoph

    (Martin-Luther University, Halle-Wittenberg)

  • Schwarze, Johannes

    (University of Bamberg)

  • Krug, Gerhard

    (Institute for Employment Research (IAB), Nuremberg)

  • Herzog, Bodo

    (ESB Reutlingen)

Abstract

Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.

Suggested Citation

  • Wunder, Christoph & Schwarze, Johannes & Krug, Gerhard & Herzog, Bodo, 2006. "Welfare Effects of the Euro Cash Changeover," IZA Discussion Papers 2508, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2508
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    Cited by:

    1. Otrachshenko, Vladimir & Popova, Olga & Tavares, José, 2016. "Psychological costs of currency transition: evidence from the euro adoption," European Journal of Political Economy, Elsevier, vol. 45(C), pages 89-100.
    2. Lagadec, Gael & Descombels, Alain, 2009. "L'ombre de la crise [The shadow of the global crisis]," MPRA Paper 17871, University Library of Munich, Germany.
    3. Daniel Kuehnle & Christoph Wunder, 2016. "Using the Life Satisfaction Approach to Value Daylight Savings Time Transitions: Evidence from Britain and Germany," Journal of Happiness Studies, Springer, vol. 17(6), pages 2293-2323, December.
    4. Thomas A. Eife & Stephan Meier, 2007. "Costly Inflation Misperceptions," Working Papers 0455, University of Heidelberg, Department of Economics, revised Oct 2007.
    5. Milena Nikolova & Boris Nikolaev, 2017. "Does Joining the EU Make You Happy? Evidence from Bulgaria and Romania," Journal of Happiness Studies, Springer, vol. 18(6), pages 1593-1623, December.
    6. Sara Bleninger, 2013. "Welfare Effects of the Euro Cash Changeover: Do Assumptions Really Matter?," SOEPpapers on Multidisciplinary Panel Data Research 577, DIW Berlin, The German Socio-Economic Panel (SOEP).
    7. Adrian Chadi & Matthias Krapf, 2017. "The Protestant Fiscal Ethic: Religious Confession And Euro Skepticism In Germany," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1813-1832, October.
    8. Herzog, Bodo, 2019. "Optimal policy under uncertainty and rational inattention," Research in International Business and Finance, Elsevier, vol. 50(C), pages 444-449.
    9. Chadi, Adrian, 2015. "Concerns about the Euro and happiness in Germany during times of crisis," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 126-146.
    10. Bodo Herzog, 2015. "Anchoring of expectations: The role of credible targets in a game experiment," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 3(6), pages 1-15, December.
    11. Thomas A. Eife & W. Timothy Coombs, 2006. "Coping with People’s Inflation Perceptions During a Currency Changeover," Working Papers 0435, University of Heidelberg, Department of Economics, revised Dec 2006.
    12. Leuwer, David & Süßmuth, Bernd, 2017. "The exchange rate susceptibility of European core industries, 1995-2010," Working Papers 147, University of Leipzig, Faculty of Economics and Management Science.

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    More about this item

    Keywords

    euro cash changeover; difference-in-differences; perceived inflation; subjective well-being;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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