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Would it have paid to be in the eurozone?

  • Michal Brzoza-Brzezina

    ()

    (National Bank of Poland, Warsaw School of Economics)

  • Krzysztof Makarski

    ()

    (National Bank of Poland, Warsaw School of Economics)

  • Grzegorz Wesolowski

    ()

    (National Bank of Poland, Warsaw School of Economics)

Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking - volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy.

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File URL: http://kolegia.sgh.waw.pl/pl/KAE/struktura/IE/struktura/ZES/Documents/Working_Papers/aewp04-13.pdf
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Paper provided by Department of Applied Econometrics, Warsaw School of Economics in its series Working Papers with number 70.

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Length: 32
Date of creation: 23 Oct 2013
Date of revision:
Handle: RePEc:wse:wpaper:70
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  16. Michał Brzoza-Brzezina & Krzysztof Makarski, 2010. "Credit Crunch in a Small Open Economy," National Bank of Poland Working Papers 75, National Bank of Poland, Economic Institute.
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  19. Zuzana Brixiova & Laura Vartia & Andreas Woergoetter, 2009. "Capital Inflows, Household Debt And The Boom Bust Cycle In Estonia," William Davidson Institute Working Papers Series wp965, William Davidson Institute at the University of Michigan.
  20. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  21. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (the central bank of Hungary).
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