ANALYSIS OF THE EFFECTS OF THE EURO CHANGEOVER ON THE INFLATION AFTER 2007

Abstract

In this paper we study the so-called changeover effect in six states that adopted Euro after 2007. We developed the new model for computation of the changeover effect. It is based on the comparison of the inflation in state that adopted Euro with average inflation in other states that are geographically near the evaluated state and have similar economics. To capture long-term impact of Euro introduction on inflation we monitored the inflation for 18 months: 6 months before Euro introduction and 12 months after it. We observed that the biggest changeover effect in 18 months was in Estonia. The inflation was 2.53% bigger than the average inflation in benchmark states. Similarly, the changeover effect in Malta was 1.08%, 1.86% in Slovenia and 0.93% in Cyprus. We did not observe any changeover effect in Latvia nor Slovakia. We also formed three regression models to predict the behavior of inflation in 2015. We used them to estimate the total inflation in Lithuania, the last state that adopted Euro on 1 January 2015. The linear model gives interval estimation of the total inflation in 18 months (1.27%; 4.76%) and logarithmic model gives interval (-0.09%; 3.34%).

Keywords

• euro
• currency changeover
• inflation
• regression analysis