The Impact of the EPU on Income and Economic Growth

Abstract

In the last two chapters, we assessed the importance of the savings of international reserves and trade creation which the European Payments Union generated in OEEC Europe in the 1950s. In this chapter, we attempt to quantify the impact of these two beneficial effects on the region’s aggregate income and medium-term rate of economic growth. In Section 11.1 we consider the assessment offered by the neoclassical growth accounting literature — exemplified by Denison (1967) — of the contribution of trade and payments liberalization to economic growth in OEEC Europe. In Section 11.2 we estimate the impact effect of the EPU on OEEC Europe’s aggregate income, based on our estimates of reserve savings and trade creation from Chapters 9 and 10. In Section 11.3 we estimate the size of the capital accumulation effect of the EPU on regional income, given three different estimates of the elasticity of aggregate output with respect to capital, each corresponding to a different model of economic growth. In Section 11.4 we examine the distinction between the Union’s effect on regional income and on regional economic growth. For the purpose of comparison, we present our estimates of the income effects of the EPU in terms of the growth effects of the growth accounting literature.ω