Adopting the Euro: a synthetic control approach

Gabriel, Ricardo Duque and Pessoa, Ana Sofia (2020): Adopting the Euro: a synthetic control approach.

Abstract

We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the Euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-Euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a gross domestic product decomposition suggests that the drivers of the economic gains and losses are heterogeneous. In particular, our results show that for the majority of Eurozone countries, Euro spurred government consumption and deterred investment and private consumption. The common currency also stimulated trade for most cases but only Germany and Ireland bear positive net trade benefits.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary union, Eurozone, Macroeconomic performance, Synthetic control method, GDP decomposition
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes

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