On the Macroeconomic Performance of the Euro Area
44 Pages Posted: 25 Jul 2018
Date Written: May 24, 2018
This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. For the Euro Area as a whole, the deterioration of the tradeoff becomes insignificant with Draghi’s ‘whatever it takes’ announcement onwards. However, our more detailed analysis shows that the detrimental effect of the Euro is more severe for peripheral Euro Area countries and that ECB policies have been less effective for these countries. These findings point to structural differences among Euro Area countries as the explanation of the detrimental effect of the Euro as ECB policies can be denoted ‘one size must fit all’ policies. We base our results on a novel empirical strategy that, consistent with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adopting the Euro.
Keywords: Euro Area, Monetary Policy, Difference-in-Differences
JEL Classification: C32, E50, F45
Suggested Citation: Suggested Citation