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What if the UK had Joined the Euro in 1999? An Empirical Evaluation Using a Global VAR

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Author Info
M. Hashem Pesaran ()
L. Vanessa Smith ()
Ron P. Smith ()

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Abstract

This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1477.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1477

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Related research
Keywords: Global VAR (GVAR); counterfactual analysis; UK and Sweden entry to Euro;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
F15 - International Economics - - Trade - - - Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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References listed on IDEAS
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  1. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-1, International Conferences on Panel Data. [Downloadable!]
    Other versions:
  3. James J. Heckman, 2000. "Causal Parameters And Policy Analysis In Economics: A Twentieth Century Retrospective," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 45-97, February. [Downloadable!] (restricted)
    Other versions:
  4. Stéphane Dées & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2005. "Exploring the international linkages of the euro area - a global VAR analysis," Working Paper Series 568, European Central Bank. [Downloadable!]
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  5. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge. [Downloadable!]
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  6. Daniel F. Waggoner & Tao Zha, 1999. "Conditional Forecasts In Dynamic Multivariate Models," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 639-651, November. [Downloadable!] (restricted)
    Other versions:
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