Costs and Benefits of Euro Membership: a Counterfactual Analysis
The aim of this paper is to gauge quantitatively the macroeconomic costs or gains of EMU membership. Building on the Global VAR framework designed by Pesaran et al. (2004), we want to shed light on the following important questions: What if the euro had never been launched? How would have evolved national outputs and inflation rates? What would have been the consequences for Italy of not participating to Stage 3? We show that we cannot draw any general conclusion for the three largest euro area members, namely Germany, France and Italy. It is however certain that these countries had, and probably still have, conflicting interests regarding the most suitable monetary policy for each of them. Conversely, small euro area members like Finland, the Netherlands and Spain, seem to have benetted from the pre-euro convergence and from the single currency regime. Besides, the single currency regime probably did not have any significant impact on price developments. Finally, the non-participation of Italy to the single currency is quite neutral on the macroeconomic performances of the euro area.
Euro; counterfactual analysis; global VAR; key currencies; foreign exchange markets; euro area
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