Adopting the Euro: A Synthetic Control Approach

50 Pages Posted: 11 May 2023

See all articles by Ricardo Duque Gabriel

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

Ana Sofia Pessoa

University of Bonn

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

Suggested Citation

Gabriel, Ricardo Duque and Pessoa, Ana Sofia, Adopting the Euro: A Synthetic Control Approach. Available at SSRN: https://ssrn.com/abstract=4445115 or http://dx.doi.org/10.2139/ssrn.4445115

Ricardo Duque Gabriel (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.ricardoduquegabriel.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ana Sofia Pessoa

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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