MONETARY INDEPENDENCE AND ECONOMIC RECOVERY AFTER COVID-19

Abstract

Macroeconomic crises often in significant output losses, but the severity and speed of recovery vary across countries. Previous studies on the effects of the 2008 financial crisis suggest that monetary policy independence may ease macroeconomic adjustment by allowing exchange rate depreciation and independent interest rate policy. However, it is less known whether such advantages also apply during exogenous shocks as the COVID-19 pandemic. This thesis examines whether economic recovery after COVID-19 differed between European countries with and without monetary independence. Based on the Mundell-Fleming model and Optimum Currency Area theory, it is expected that countries with sovereign currencies would experience a smaller GDP decline in 2020 and a stronger recovery in the years after the pandemic. To test this, a Differences-in-Differences (DiD) analysis is conducted using panel data for 28 European countries between 2015 and 2024. Annual GDP growth is used to measure economic performance. The results show no statistically significant differences between the two groups. The findings provide no empirical support for the hypothesis that monetary independence was associated with either a milder downturn or a higher recovery following the COVID-19 shock.