Krzysztof Makarski, Ph.D., Economic Institute, National Bank of Poland, Swietokrzyska 11/21, Warszawa, 00-919, Poland and Michal Gradzewicz, Ph.D., Bureau of Enterprises, Households and Markets, Economic Institute, National Bank of Poland, Swietokrzyska 11/21, Warszawa, 00-919, Poland.
After accession to the European Union in 2004, Poland, as well as the other New Member States, is going to adopt the Euro as a national currency and become a member of the Euro area. However, the accession to the Euro area implies important changes in both the macroeconomic policy and the behavior of the accessing economy. The most important of these are:
• fixing of the exchange rate against the other participants of the Euro area,
• resignation from the autonomous monetary policy in favor of the common monetary policy conducted by the ECB.
Our contribution to the discussion on the consequences of Euro adoption concentrates on the effects of these changes. After accession to the Euro area monetary policy will be conducted by the European Central Bank and will be responding, in the first place, to the events affecting the whole Euro area. In the presence of asymmetric shocks, the common monetary policy may result in higher of economic growth and associated costs of these fluctuations.
In order to perform this calculation, we propose a Dynamic Stochastic General Equilibrium model (DSGE) of two economies (Poland and the Euro area) linked through trade in goods and services and incomplete international assets market. In order to specify properly the parameters of the model, we decided to estimate a relatively large number of parameters on the basis of the data from both economies. It allows us to develop a model that mimics closely the behavior of both economies.
In the DSGE methodology the economy is described in terms of preferences, technologies and the rules of market clearing, thus the model is parametrized in terms of so called “deep” parameters. Hence these parameters are invariant to policy changes and it is possible to analyze the consequences of these changes in a way that is immune to the Lucas critique. All these features make the DSGE framework a parsimonious tool to analyze the consequences of resignation from the autonomous monetary policy in Poland.
Since there is scarce evidence that higher fluctuations cause lower economic growth, we assumed that changes in the business cycle behavior will not have any long run effect on the Polish economy. We focused on the change in the business cycle behavior of the main macroeconomic variables. We found that the Eurozone accession in Poland, increases the volatility of GDP, consumption and labor - the standard deviation of GDP, consumption and labor, goes up from, respectively, 2.62%, 1.33%, and 1.30% to, respectively, 2.72%, 2.25, and 1.42% - and decreases the volatility of inflation - the standard deviation of inflation goes down from 2.42% to 0.96%. We additionally present how different factors involved with the Eurozone accession affect these outcomes.
We also computed the welfare effect of this change and we found that the regime change will have the same effect on welfare as the decline of consumption in period after the Eurozone accession by 6.17 % (or a lifetime consumption decline by 0.068%).