Prague Economic Papers 2014, 23(4):446-473 | DOI: 10.18267/j.pep.493

The Welfare Cost of the EMU for Transition Countries

Alexandra Ferreira-Lopes
ISCTE Business School - University Institute of Lisbon, Economic Department, Lisboa, Portugal (alexandra.ferreira.lopes@iscte.pt).

The Czech Republic, Hungary, and Poland are set to join the Economic and Monetary Union (EMU) in the near future. This paper offers a framework for the quantitative evaluation of the economic costs of joining the EMU. Using an open economy dynamic general equilibrium model with sticky prices, we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each of these economies. The main benefit of this general equilibrium approach is that we can directly evaluate the effects of monetary policy in terms of welfare. Our findings suggest that the Czech Republic and Poland may experience sizable welfare costs as a result of joining the EMU. Results for Hungary are less striking as welfare costs in this country seem to be negligible in the benchmark economy. Nevertheless, costs of joining the EMU are higher if government shocks are important and when the trade share with the EMU is small.

Keywords: welfare analysis, Poland, monetary policy, Hungary, euro, Czech Republic
JEL classification: C68, E52, F41

Published: January 1, 2014  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Ferreira-Lopes, A. (2014). The Welfare Cost of the EMU for Transition Countries. Prague Economic Papers, 23(4), 446-473. doi: 10.18267/j.pep.493
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Angeloni, I., Flad, M., Mongelli, F. P. (2005), "Economic and Monetary Integration of the New Member States - Helping to Chart the Route." ECB Occasional Paper Series No. 36. Go to original source...
    2. Blanchard, O., Kahn, C. (1980), "The Solution of Linear Difference Models under Rational Expectations." Econometrica, Vol. 48, No. 5, pp. 1305-1311. Go to original source...
    3. Brouwer, J., Paap, R., Viaene, J. M. (2008), "The Trade and FDI Effects of EMU Enlargement." Journal of International Money and Finance, Vol. 27, No. 2, pp. 188-208. Go to original source...
    4. Bruha, J., Podpiera, J., Polák, S. (2010), "The Convergence Dynamics of a Transition Economy: The Case of the Czech Republic." Economic Modelling, Vol. 27, No. 1, pp. 116-124. Go to original source...
    5. Carré, M., Collard, F. (2003), "Monetary Union: a Welfare Based Approach." European Economic Review, Vol. 47, No. 3, pp. 521-552. Go to original source...
    6. Ca'Zorzi, M., Santis, R. A. de; Zampolli, F. (2012), "The Minimum Economic Dividend for Joining a Currency Union." German Economic Review, Vol. 13, No. 2, pp. 127-141. Go to original source...
    7. Chari, V. V., Kehoe, P. J., McGrattan, E. R. (2002a), "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?" Review of Economic Studies, Vol. 69, No. 3, pp. 533-563. Go to original source...
    8. Chari, V. V., Kehoe, P. J., McGrattan, E. R. (2002b), "Technical Appendix: Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?" Federal Reserve Bank of Minneapolis, Research Department Staff Report 277. Go to original source...
    9. Clarida, R., Gali, J., Gertler, M. (1999), "The Science of Monetary Policy: A New Keynesian Perspective." Journal of Economic Literature, Vol. 37, No. 4, pp. 1661-1707. Go to original source...
    10. Clarida, R., Gali, J., Gertler, M. (2000), "Monetary Policy Rules and Macroeconomic Stability." The Quarterly Journal of Economics, Vol. 115, No. 1, pp. 147-180. Go to original source...
    11. Cooley, T. F. (ed.) (1995), Frontiers of Business Cycles Research. Princeton: Princeton University Press.
    12. Corsetti, G. (2008), "A Modern Reconsideration of the Theory of Optimal Currency Area." European Commission, Directorate-General for Economic and Financial Affairs, European Economy Economic Papers 308.
    13. Csajbók, A., Csermely, Á. (eds.), (2002), "Adopting the Euro in Hungary: Expected Costs, Benefits and Timing." National Bank of Hungary Occasional Papers 24.
    14. Czech National Bank (2012), "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2012." Edited by Jakub Matějů & Romana Zamazalová, Occasional Publications Edited Volumes, Czech National Bank, Monetary and Statistics Department, No. as12.
    15. Domowitz, I., Hubbard, R. G., Petersen, B. C. (1986), "Business Cycles and the Relationship between Concentration and Price Cost-Margins." Rand Journal of Economics, Vol. 17, No. 1, pp. 1-18. Go to original source...
    16. Fidrmuc; J., Korhonen, I. (2003), "Similarity of Supply and Demand Shocks Between the Euro Area and the CEECs." Economic Systems, Vol. 27, No. 3, pp. 313-334. Go to original source...
    17. Frankel, J. A., Rose, A. K. (1998), "The Endogeneity of the Optimum Currency Area Criteria." Economic Journal, Vol. 108, No. 449, pp. 1009-1025. Go to original source...
    18. Furceri, D., Karras, G. (2006), "Are the New Members Ready for the Euro? A Comparison of Costs and Benefits." Journal of Policy Modeling, Vol. 28, No. 1, pp. 25-38. Go to original source...
    19. Gali, J., Gertler, M., Lopez-Salido, J. D. (2001), "European Inflation Dynamics." European Economic Review, Vol. 45, No. 7, pp. 1237-1270. Go to original source...
    20. Goodfriend, M., King, R. G. (1997), "The New Neoclassical Synthesis and the Role of Monetary Policy." NBER Macroeconomics Annual, pp. 231-283. Go to original source...
    21. Hayo, B., Hoffman, B. (2006), "Comparing Monetary Policy Reactions Functions: ECB versus Bundesbank." Empirical Economics, Vol. 31, No. 3, pp. 645-662. Go to original source...
    22. Holtemöller, O. (2007), "The Effects of Joining a Monetary Union on Output and Inflation Variability in Accession Countries." Mimeo.
    23. Hurník, J., Tůma, Z., Vávra, D. (2010), "The Euro Adoption Debate Revisited: The Czech Case." Czech Journal of Economics and Finance (Finance a úvěr), Vol. 60, No. 3, pp. 194-212, Charles University Prague, Faculty of Social Sciences.
    24. Jorgenson, D., Gollop, F., Fraumeni, B. (1987), Productivity and US Economic Growth. Cambridge, Massachusetts: MIT Press.
    25. Kenen, P. (1969), "The Theory of Optimum Currency Areas: an Eclectic View." in: R. Mundell and A. K. Swoboda, eds., Monetary Problems of the International Economy. Chicago: University of Chicago Press, pp. 41-60.
    26. Kolasa, M. (2009), "Structural Heterogeneity or Asymmetric Shocks? Poland and the Euro Area through the Lens of a Two-Country DSGE Model." Economic Modelling, Vol. 26, No. 6, pp. 1245-1269. Go to original source...
    27. Lane, P. (2001), "The New Open Economy Macroeconomics: A Survey." Journal of International Economics, Vol. 54, No. 2, pp. 235-266. Go to original source...
    28. Levasseur, S. (2008), "Updating Empirical Evidence on Business Cycles Synchronization between CEECs and the Euro Area: How Important is the Recent Period." Document de Travail No. 2008-11, April, OFCE.
    29. Lucas Jr., R. (1987), Models of Business Cycles. Yrjö Jahnsson Lecture Series, Basil: Blackwell Publishers.
    30. Mackinnon, R. I. (1963), "Optimum Currency Areas." American Economic Review, Vol. 53, No. 4, pp. 717-725.
    31. Monacelli, T. (2000), "Relinquishing Monetary Policy Independence." Boston College Working Papers in Economics 483.
    32. Mundell, R. (1961), "A Theory of Optimum Currency Areas." American Economic Review, Vol. 51, No. 4, pp. 657-665.
    33. National Bank of Poland (2004), A Report on the Costs and Benefits of Poland's Adoption of the Euro. March.
    34. Obstfeld, M., Rogoff, K. (1995), "Exchange Rate Dynamics Redux." Journal of Political Economy, Vol. 103, No. 3, pp. 624-660. Go to original source...
    35. Obstfeld, M., Rogoff, K. (1998), Foundations of International Macroeconomics. MIT Press.
    36. Prescott, E. (1986), "Theory ahead of Business-Cycle Measurement." Carnegie-Rochester Conference Series on Public Policy, Vol. 25, No. 1, pp. 11-44. Go to original source...
    37. Rose, A. K. (2000), "One Money, One Market: The Effect of Common Currencies on Trade." Economic Policy, Vol. 15, No. 30, pp. 7-46. Go to original source...
    38. Sánchez, M. (2007), "Monetary Stabilisation in a Currency Union: The Role of Catching-Up Member States." Journal of Policy Modeling, Vol. 29, No. 1, pp. 29-40. Go to original source...
    39. Sánchez, M. (2008), "Implications of Monetary Unions for Catching-Up Member States." Open Economies Review, Vol. 19, No. 3, pp. 371-390. Go to original source...
    40. Taylor, J. B. (1993), "Discretion versus Policy Rules in Practice." Carnegie-Rochester Conference Series on Public Policy, Vol. 39, No. 1, pp. 195-214. Go to original source...
    41. Whalley, J. (1985), Trade Liberalization among Major World Trading Areas. Cambridge, MA: MIT Press.
    42. Wojcik, C. (2000), "A Critical Review of Unilateral Euroization Proposals: the Case of Poland." Focus on Transition 2, Austrian National Bank, pp. 48-76.
    43. Woodford, M. (2003), Interest and Prices - Foundations of a Theory of Monetary Policy. Princeton: Princeton University Press. Go to original source...
    44. Zienkowski, L. (2000), "Labor and Capital Productivity in Poland." Central Statistics Office, Poland.

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content