Would it Have Paid to Be in the Eurozone?

Abstract

Giving up an independent monetary policy and a flexible exchange rate are the key sources of costs and benefits entailed to joining a monetary union. In this paper we analyze their ex post impact on the stability of the Polish economy during the recent financial crisis. To this end we construct a small open economy DSGE model and estimate it for Poland and the euro area. Then we run a counterfactual simulation, assuming Poland's euro area accession in 1q2007. The results are striking -volatilities of GDP and inflation increase substantially. In particular, had Poland adopted the euro, GDP growth would have oscillated between -6% and +9% (-9% to +11% under more extreme assumptions) instead of between 1% and 7%. We conclude that during the analyzed period independent monetary policy and, in particular, the flexible exchange rate played an important stabilizing role for the Polish economy. JEL: E32, E58, E65

Do long-term interest rates drive GDP and inflation in small open economies? Evidence from Poland

“…As it is a common practice in the literature I set prior assumptions such that they are relatively uninformative and in line with the existing studies taking a special account for applications for Poland (see e.g. Brzoza-Brzezina et al 2014;Grabek et al 2007). I run a standard estimation procedure using the Metropolis-Hastings algorithm with 2 chains (500 000 draws each) out of which I burn the first half of each.…”

“…Furthermore, supply factors seem to have played an important role in determining Polish GDP which is reflected in significant share of the productivity shock in GDP variance decomposition. The risk premium and the export preferences shocks, in turn, impact GDP by driving exchange rate fluctuations were also the important determinants of GDP volatility in the SOE (Brzoza-Brzezina et al 2014). Furthermore, there is also a substantial role of monetary policy and time preference shocks in driving GDP volatility that seems to result from the impact of these shocks on consumption volatility.…”

Endogeneity and Specialization in the European Monetary Union

“…For example, Poland's experience from the outbreak of the global crisis in 2008 is that the PLN floating rate has significantly facilitated adjustment to the external global shock affecting Poland and the EMU [Konopczak, Marczewski, 2011, pp. 14-18;Brzoza-Brzezina et al, 2012]. In contrast, the EMU countries that were hit hardest by the global crisis could not devaluate the euro.…”