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The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules

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  • Stefano d'Addona

    ()
    (Department of International Studies, University of Rome 3)

  • Ilaria Musumeci

    (Department of International Studies, University of Rome 3)

Abstract

We analyze the current state of monetary integration in Europe, focusing on the United Kingdom’s position regarding the European Monetary Union (EMU). The interest rate decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor rule. Comparison of the monetary conduct of these two institutions provides useful guidance in identifying the differences that the British Government claims motivating its refusal to join the EMU. Testing for forward-looking behavior and possible asymmetries in policy responses, we show evidence supporting the opt-out decision taken by the British Government.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 225.

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Length: 38 pages
Date of creation: 26 Mar 2012
Date of revision: 26 Mar 2012
Handle: RePEc:rtv:ceisrp:225

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Keywords: Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing;

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  1. Willem H. Buiter, 2008. "Why the United Kingdom Should Join the Eurozone," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 269-282, December.
  2. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  4. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, Elsevier, vol. 67(2), pages 159-164, May.
  5. DOLADO, J.J. & MARIA-DOLORES, R. & RUGE-MURCIA, Francisco J., 2003. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-24, Universite de Montreal, Departement de sciences economiques.
  6. Riccardo DiCecio & Edward Nelson, 2009. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," NBER Working Papers 14894, National Bureau of Economic Research, Inc.
  7. Bennett T. McCallum, 2000. "Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan," NBER Working Papers 7725, National Bureau of Economic Research, Inc.
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  9. Surico, Paolo, 2007. "The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(1), pages 305-324, January.
  10. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, Elsevier, vol. 49(2), pages 485-503, February.
  11. Carlo Altavilla & Luigi Landolfo, 2005. "Do central banks act asymmetrically? Empirical evidence from the ECB and the Bank of England," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(5), pages 507-519.
  12. Patrick Minford & David Meenagh & Bruce Webb, 2004. "Britain and EMU: Assessing the Costs in Macroeconomic Variability," The World Economy, Wiley Blackwell, vol. 27(3), pages 301-358, 03.
  13. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, Elsevier, vol. 22(1), pages 39-59, January.
  14. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, Elsevier, vol. 52(1-2), pages 205-228.
  15. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, Elsevier, vol. 67(2), pages 165-171, May.
  16. Thomas, Ryland & Hills, Sally & Dimsdale, Nicholas, 2010. "The UK recession in context — what do three centuries of data tell us?," Bank of England Quarterly Bulletin, Bank of England, vol. 50(4), pages 277-291.
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