Working Paper: NBER ID: w7382
Authors: Michael B. Devereux; Charles Engel; Cedric Tille
Abstract: This paper explores the implications of the European single currency within a simple sticky price intertemporal model. The main issue we focus on is how the euro may alter the responsiveness of consumer prices to exchange rate changes. Our central conjectures is that the acceptance of the euro will lead European prices to become more insulated from exchange-rate volatility, much the way U.S. consumer prices already are. We show that this has profound consequences for both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and, more surprisingly U.S. shares in Europe's good fortune. Alternative assumptions about how pricing behavior will change lead to different conclusions, but in all cases we can derive specific implications for expected levels and volatility of macroeconomic varialbes.
Keywords: No keywords provided
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro adoption (F36) | insulation of European prices from exchange rate volatility (F31) |
| insulation of European prices from exchange rate volatility (F31) | European welfare (O52) |
| euro adoption (F36) | expected aggregate consumption in Europe (E20) |
| euro adoption (F36) | reduced exchange rate passthrough to prices (F31) |
| reduced exchange rate passthrough to prices (F31) | stabilization of expected consumption in Europe (E21) |
| insulation of European prices from exchange rate volatility (F31) | altered volatility of macroeconomic aggregates in Europe and the US (E39) |
| euro adoption (F36) | benefits for the US (H56) |