Dullien, Sebastian Fritsche, Ulrich Groessl, Ingrid Paetz, Michael
Year of Publication:
DEP (Socioeconomics) Discussion Papers, Macroeconomics and Finance Series 7/2009
Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades.