Welfare Implications of Joining a Common Currency

34 Pages Posted: 5 May 2005

See all articles by Michele Ca' Zorzi

Michele Ca' Zorzi

European Central Bank (ECB)

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: February 2005

Abstract

This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries' supply shocks and the larger the variance of real exchange rate shocks.

Keywords: Balassa-Samuelson Effect, Currency Union, Monetary Policy, Welfare

JEL Classification: E52, E58, F33, F40

Suggested Citation

Ca' Zorzi, Michele and De Santis, Roberto A. and Zampolli, Fabrizio, Welfare Implications of Joining a Common Currency (February 2005). ECB Working Paper No. 445. Available at SSRN: https://ssrn.com/abstract=657881

Michele Ca' Zorzi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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