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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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