Assessing the Growth Effect of Common Currency Adoption: Synthetic Control Approach

Pei-Chien Lin¹ and Ling-Yu Chen^1,

¹Department of Industrial Economics, Tamkang University, Taiwan, R.O.C.

Cite this paper:
Pei-Chien Lin and Ling-Yu Chen. Assessing the Growth Effect of Common Currency Adoption: Synthetic Control Approach. Journal of Finance and Economics. 2017; 5(6):269-280. doi: 10.12691/jfe-5-6-3

Abstract

This study empirically assesses the growth effect of adopting the euro by applying a recently developed econometric technique, the synthetic control method (SCM), to implement data-driven comparative case studies for the euro zone. For analytical purposes, we classify the 12 euro-adopting countries into two country groups: core and peripheral countries. The results from the SCM algorithm show that the patterns of per capita GDP in the core (peripheral) countries are generally lower (higher) than those of their counterfactual units. However, the outcomes of the placebo tests indicate that these differences are statistically insignificant, thus implying that the introduction of the euro system neither improves nor impairs the economic growth of these two groups of countries that adopted the euro during 1991-2013. As for the three European Union countries that did not adopt the euro, the results of the inverse SCM analysis show that Denmark would be better off if it had adopted the euro. However, in the cases of Sweden and the United Kingdom, not adopting the euro system may have been a better choice, especially following the sovereign debt crisis.

Keywords:
economic growth synthetic control method euro euro zone

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