The Euro Adoption Debate Revisited: The Czech Case

Although price stability has been achieved in the euro area, the first ten years of the euro have not brought the expected long-term output growth benefits. The Czech Republic – an economy that has achieved price stability without the euro – should then reframe the debate about euro area membership in traditional terms of the exchange rate regime choice, focusing on macroeconomic volatilities in the two regimes. Our experiments show that inflation volatility in the Czech Republic is likely to increase following euro area accession. At the same time, euro area membership is not likely to fundamentally change the volatility of consumption growth. Using past developments, the size of the exchange rate shocks identified relative to the rest of the shocks is simply not high enough to rationalize the abandonment of the flexible exchange rate and independent monetary policy in favor of the fixed exchange rate regime.