On the Macroeconomic Performance of the Euro Area

This paper examines whether Euro countries would have faced a more favourable inflation output variability trade off without the Euro. We find evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. However, the deterioration of the trade off becomes insignificant with Draghi’s ‘whatever it takes’ announcement. We base our results on a novel empirical strategy that, consistent with monetary theory, models the joint determination of the variability of inflation and output conditioned on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adopting the Euro.