Assessing Effects of Joining Common Currency Area with Large-Scale DSGE model: A Case of Poland

In this paper we present a large scale dynamic stochastic general equilibrium model, in order to analyze and simulate effects of Euro introduction in Poland. Presented framework is a based on a two-country open economy model, where foreign acts as the Eurozone, and home as a candidate country. We have implemented various types of structural frictions in the open economy block, that generate empirically observable deviations from purchasing power parity rule. We consider such mechanisms as a division between tradables and nontradables, endogenous pricing-to-market with transportation costs, Balassa-Samuelson effect and non-homothetic production functions. Moreover model contains market imperfections accounting for deviations from UIP, therein especially important features like incomplete capital market with endogenous risk premium. Apart from open economy block, model encapsulates numerous labor market frictions. The construction of labor market module is based on search model with endogenous choice in intensive and extensive labor supply supplemented by imperfect unemployment insurance scheme. We propose a production structure (horizontal and vertical) w ith CRESH technology in production sectors, which allows us to calibrate structural parameter s directly on sectoral national accounts. Investments in the production process are restricted by time-to-build mechanism. Central bank policy block provides framework for testing monetary policy in both fixed and floating exchange rate regime. The pricing mechanism is characterized by nominal frictions. We proposed merged n-period, finite horizon price contracts with Bertrand competition model including changes in the number of firms in business cycle. Model investigates the effects of shocks directly connected with introducing Euro currency in short run including real transaction costs shock, price level shock and interest rates shock. Besides short-term effects we assess long-term impacts associated with real appreciation pressure