Adopting the Euro: A Synthetic Control Approach

50 Pages Posted: 7 May 2020 Last revised: 6 Jan 2021

See all articles by Ricardo Duque Gabriel

Ricardo Duque Gabriel

University of Bonn - Department of Economics

Ana Sofia Pessoa

University of Bonn - Department of Economics

Date Written: December 1, 2020

Abstract

We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a GDP decomposition suggests that the drivers of the economic gains and losses are heterogeneous. In particular, our results show that adopting the euro spurred government consumption and deterred investment and private consumption. The common currency also stimulated trade for most cases but only Germany and Ireland bear positive net trade benefits.

Keywords: Monetary union; Eurozone; Synthetic control method; GDP decomposition; Macroeconomic performance

JEL Classification: E30, E60, C32, E02, E52, E65

Suggested Citation

Gabriel, Ricardo Duque and Pessoa, Ana Sofia, Adopting the Euro: A Synthetic Control Approach (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3563044 or http://dx.doi.org/10.2139/ssrn.3563044

Ricardo Duque Gabriel (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Ana Sofia Pessoa

University of Bonn - Department of Economics ( email )

Bonn
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
214
Abstract Views
988
rank
185,025
PlumX Metrics