The admission of accession countries to an enlarged monetary union: a tentative assessment

Author (Corporate)
Series Title
Series Details No.216, February 2003
Publication Date February 2003
Content Type

Article abstract:

The enlargement of the European monetary union to include the accession countries (ACs) will not lead to higher average inflation in the enlarged euro area, but only to inflation redistribution across countries if continuity of the monetary policy framework is preserved. In the short term, unanticipated shocks to the real exchange rate may instead affect aggregate inflation if member countries' economic structure differs. When comparing welfare, inflation and output stabilisation, we find that the size, differences in economic structure and the variance-covariance matrix of supply and real exchange rate shocks play a key role. The numerical results indicate that the implications for the euro area are significant only if we assume a strong real exchange rate appreciation and if ACs are weighted in terms of purchasing power parity standards. In the event of real exchange rate or country-specific supply shocks in ACs, the consequences would be limited for both the current and the enlarged euro area, but sizeable for ACs themselves.

The authors are Michele Ca'Zorzi and Roberto De Santis.

Source Link Link to Main Source http://www.ecb.int/pub/pdf/scpwps/ecbwp216.pdf
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