1. Better Off without the Euro? Evaluating Monetary Policy and Macroeconomic Performance for Denmark, Sweden and the U.K. Stefan Krause, Emory University The First Decade of European Monetary Union (May 28-30, 2008)

2. Motivation Over the past two decades, macroeconomic performance has improved in both industrialized and developing countries. Evidence suggests that Central Banks have played a decisive role in reducing both the level and the variability of inflation have likely contributed (at least partially) to smoothing business cycles as well 2 The First Decade of European Monetary Union

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5. Central Questions  How much of the macroeconomic performance gain experienced by Denmark, Sweden, and the U.K. is due to increased monetary policy efficiency?  Could further declines in macroeconomic volatility have been attained if these three countries would have adopted the Euro starting January 1999? 5 The First Decade of European Monetary Union

6. Outline of the Presentation 1.Measuring Monetary Policy Efficiency under independent policy (factual) 2.Macroeconomic Performance under the Euro (counter-factual) 3.Conclusions 6 The First Decade of European Monetary Union

7. Identification tool: Efficiency Frontier The efficiency frontier represents the “best” a Central Bank can do Better policy: Movements towards the frontier Better luck: Frontier moves inward 7 The First Decade of European Monetary Union

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11. Results – Part I Comparing macro performance for Denmark, Sweden and the U.K. between 91-98 and 99-06 Further performance improvement for all three countries  ~25% performance improvement for Denmark (about 80% due to policy)  ~75% performance improvement for Sweden (almost 100% due to policy)  ~90% performance improvement for the U.K. (about 90% due to policy) 11 The First Decade of European Monetary Union

12. Generating "alternate economies" Recursive bootstrap technique Iteration process to obtain 1,000 bootstrap samples of real GDP growth and inflation (alternate economies) performance point under the Euro: average value (out of the 1,000 replications) of the pair of volatility measures 12 The First Decade of European Monetary Union

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16. Results – Part II Macroeconomic Performance under the Euro 10-11% loss in macroeconomic performance for Sweden 7-8% loss in the case of the U.K. for Denmark, relatively small performance change; performance improvement from adopting the Euro depends on relative preference for inflation stability. 16 The First Decade of European Monetary Union

17. Conclusions Monetary policy played a sizeable role in contributing to the reduction in inflation and real growth fluctuations, mostly for Sweden in the U.K. None of the three countries would have experienced a larger macroeconomic performance gain if they had joined the EMU in 1999. 17 The First Decade of European Monetary Union

18. What’s next? Model specification? Examine with alternative models Higher frequency data The U.K. is not a price taker – likely impact on the ECB rate Your comments/suggestions 18 The First Decade of European Monetary Union