The impact of the European Monetary Union on the stability of the Greek economy

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Date
2000-08-01T00:00:00Z
Authors
Roussou, Helen
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Abstract
The debate about the desirability and viability of a monetary union, particularly the European Economic and Monetary Union (EMU), has focussed either on the existence of the appropriate adjustment mechanisms necessary to counteract disturbances or on the benefits and costs of participation. The benefits include efficiency gains deriving from the increased integration while the costs are related mainly to the elimination of national monetary sovereignty. The effects of the abandonment of national monetary independence on the stability of a small open economy, such as Greece, have attracted little attention. This study evaluates the impact of Greece's joining the EMU by examining how the economy reacts to disturbances, specific to this country, before and after giving up monetary policies as a means of adjustment. For this purpose, we use stochastic simulations of a macro-econometric multi-country model, QUEST II. We identify the structure of disturbances used in the stochastic simulations by imposing long-term restrictions to the coefficients of a structural Vector Autoregression. The results from the stochastic simulations indicate that in the monetary union the stability of output will increase only slightly. The domestic price level will become more volatile. Also, the public sector deficit and debt as percentage of GDP, the (European) interest rates and the exchange rate with respect to the US Dollar will all be more stable in the monetary union.
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