Better Out Than In? Regional Disparity and Heterogeneous Income Effects of the Euro

50 Pages Posted: 12 Oct 2021

See all articles by Sang-Wook (Stanley) Cho

Sang-Wook (Stanley) Cho

UNSW Australia Business School, School of Economics

Sally Wong

Reserve Bank of Australia

Date Written: October 12, 2021

Abstract

This paper conducts a counterfactual analysis on the effect of adopting the euro on regional income and disparity within Denmark and Sweden. Using the synthetic control method, we find that Danish regions would have experienced small heterogeneous effects from adopting the euro in terms of GDP per capita, while all Swedish regions are better off without the euro with varying magnitudes. Adopting the euro would have decreased regional income disparity in Denmark, while the effect is ambiguous in Sweden due to greater convergence among non-capital regions but further divergence with Stockholm. The lower disparity observed across Danish regions and non-capital Swedish regions as a result of eurozone membership is primarily driven by losses suffered by high-income regions rather than from gains to low-income regions. These results highlight the cost of foregoing stabilisation tools such as an independent monetary policy and a floating exchange rate regime. For Sweden in particular, macroeconomic stability outweighs the potential efficiency gains from a common currency.

Keywords: currency union, euro, synthetic control method, regional income disparity

JEL Classification: C21, E65, F45, O52, R1

Suggested Citation

Cho, Sang-Wook and Wong, Sally, Better Out Than In? Regional Disparity and Heterogeneous Income Effects of the Euro (October 12, 2021). CAMA Working Paper No. 88/2021, UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3940754 or http://dx.doi.org/10.2139/ssrn.3940754

Sang-Wook Cho (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Sally Wong

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

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