What if Denmark, Sweden and the UK had joined the euro area in 2003?
The calibrated model can be easily used to simulate the impact on competitiveness of a wide range of policy decisions. Here we focus on the decision of Denmark, Sweden, and the UK to remain outside the euro area and the question of whether their competitiveness has suffered from facing the international trade frictions associated with the use of multiple currencies. We do so by simulating counterfactual scenarios where we change the estimated level of trade resistance between countries with and without the common currency. In order to proxy for the impact of the euro on trade frictions, we rely on the findings from the substantial body of empirical research that in the past decade has investigated the trade-enhancing effects of the euro and, in general, of monetary unions. Results are very heterogeneous due to the adoption of different econometric specifications. Nonetheless, economists seem to be reaching the consensus that the euro has had a positive effect on trade, in the order of
