Confronting the Inflationary Pressures of Introducing the Euro with the Effects of Negative External Shocks

Abstract

Research background with the introduction of the euro as the domestic currency, economies have faced inflationary pressures caused by price convergence towards higher levels. During the last period of significant negative shocks from the environment, by entering the euro area, the negative effects of the likelihood of inflation caused by the introduction of the euro may be absent. Purpose the aim of this paper is to prove that inflation caused by joining the euro area will not materialize due to the negative effects of external shocks. Research methodology A panel analysis with a fixed effects model was conducted for two models. Model 1 represents the countries that introduced the euro before the escalation of the global financial crisis and Model 2 represents the countries that introduced the euro after the development of the global financial crisis. Results the research confirmed that due to current negative external shocks and rising long-term interest rates in financial markets, the effect of inflation due to the introduction of the euro will be absent among EU members that will adopt the euro as a common currency in the next few years. Novelty The results of the research contribute to the scientific prediction of business and financial trends. The creators of macroeconomic models and monetary policy can use the results to define measures, instruments and activities more precisely for achieving and maintaining macroeconomic balance.