NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model

Riccardo DiCecio, Edward Nelson

NBER Working Paper No. 14894
Issued in April 2009
NBER Program(s):   ME

Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom's monetary policy options using a structural open-economy model. We use the Erceg, Gust, and López-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.

download in pdf format
   (177 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14894

Published: Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model, Riccardo DiCecio, Edward Nelson. in Europe and the Euro, Alesina and Giavazzi. 2010

Users who downloaded this paper also downloaded these:
Hall, Jaffe, and Trajtenberg w8498 The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools
Hoshi and Kashyap w7250 The Japanese Banking Crisis: Where Did It Come From and How Will It End?
Clarida, Galí, and Gertler w8604 Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach
Calomiris, Orphanides, and Sharpe w4800 Leverage as a State Variable for Employment, Inventory Accumulation, andFixed Investment
Jovanovic and Rousseau w8081 Why Wait? A Century of Life Before IPO
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us