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Can We Prevent Boom-Bust Cycles During Euro Area Accession?

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  • Michał Brzoza-Brzezina
  • Pascal Jacquinot
  • Marcin Kolasa

Abstract

Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and borrowing from abroad. Over time inflation deteriorated external competitiveness, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. We find that exchange rate revaluation is the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.
    • Handle: RePEc:kap:openec:v:25:y:2014:i:1:p:35-69
    DOI: 10.1007/s11079-013-9299-z
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    More about this item

    Keywords

    Boom-bust cycles; Euro area accession; Dynamic general equilibrium models; E52; E58; E63;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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