Welfare Effects of the Euro Cash Changeover

35 Pages Posted: 11 Jan 2007

See all articles by Christoph Wunder

Christoph Wunder

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Department of Economics; University of Bamberg

Johannes Schwarze

University of Bamberg; German Institute for Economic Research (DIW Berlin); IZA Institute of Labor Economics

Gerhard Krug

Institute for Employment Research (IAB); University of Erlangen-Nuremberg - Chair of Empirial Economic Sociology

Bodo Herzog

Reutlingen University - ESB Business School

Date Written: December 2006

Abstract

Using merged data from the British Household Panel Survey (BHPS) and the German Socio-Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.

Keywords: subjective well-being, euro cash changeover, perceived inflation, difference-in-differences

JEL Classification: E31, I31

Suggested Citation

Wunder, Christoph and Schwarze, Johannes and Krug, Gerhard and Herzog, Bodo, Welfare Effects of the Euro Cash Changeover (December 2006). IZA Discussion Paper No. 2508. Available at SSRN: https://ssrn.com/abstract=955846

Christoph Wunder (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Department of Economics ( email )

Lange Gasse 20
Nuernberg, D-90403
Germany

University of Bamberg ( email )

Feldkirchenstr. 21
Bamberg 96045
Germany

Johannes Schwarze

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg 96045
Germany
+49 951 863 2600 (Phone)
+49 951 863 5569 (Fax)

German Institute for Economic Research (DIW Berlin)

Mohrenstraße 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gerhard Krug

Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

HOME PAGE: http://www.iab.de/asp/mitarbeiterDB/showMitarbeiter.asp?pkyMitarbeiter=207

University of Erlangen-Nuremberg - Chair of Empirial Economic Sociology ( email )

Findelgasse 7/9
Nuremberg, 90402
Germany

HOME PAGE: http://www.sozialforschung.rw.uni-erlangen.de/lehrstuhlteam/mitarbeiterinnen/gerhard-krug.shtml

Bodo Herzog

Reutlingen University - ESB Business School ( email )

Alteburgstr. 150
Reutlingen, 72762
Germany

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