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What if the UK has Joined the Euro in 1999? An Empirical Evaluation using a Global VAR

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Abstract

We provide a conceptual framework to analysis counterfactual scenarios using macroeconometric models. We consider UK entry to the euro. We derive conditional probability distributions for the difference between the future realisations of variables of interest subject to UK entry restrictions being fully met over a given period, and the alternative realisations without the restrictions. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. We use the Global VAR 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 UK entry.

Suggested Citation

  • Pesaran, M.H. & Smith, L.V. & Smith, R.P, 2005. "What if the UK has Joined the Euro in 1999? An Empirical Evaluation using a Global VAR," Cambridge Working Papers in Economics 0528, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0528
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    1. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
    2. 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.
    3. Pesaran M.H. & Schuermann T. & Weiner S.M., 2004. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 129-162, April.
    4. James J. Heckman, 2000. "Causal Parameters and Policy Analysis in Economics: A Twentieth Century Retrospective," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 45-97.
    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.
    6. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Edda Claus & Mardi Dungey & Renée Fry, 2008. "Monetary Policy in Illiquid Markets: Options for a Small Open Economy," Open Economies Review, Springer, vol. 19(3), pages 305-336, July.
    2. Koukouritakis, Minoas & Papadopoulos, Athanasios P. & Yannopoulos, Andreas, 2015. "Linkages between the Eurozone and the South-Eastern European countries: A global VAR analysis," Economic Modelling, Elsevier, vol. 48(C), pages 129-154.
    3. Povilas Lastauskas & Julius Stakėnas, 2022. "Dancing Alone or Together: The Dynamic Effects of Independent and Common Monetary Policies," Advances in Econometrics, in: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling, volume 43, pages 217-241, Emerald Group Publishing Limited.
    4. Thomas Breuer & Martin Jandacka & Klaus Rheinberger & Martin Summer, 2009. "How to Find Plausible, Severe and Useful Stress Scenarios," International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 205-224, September.
    5. Jérôme Héricourt, 2004. "And if one size fit all after all? A counterfactual examination of the ECB monetary policy under Duisenberg presidency," Cahiers de la Maison des Sciences Economiques bla04004a, Université Panthéon-Sorbonne (Paris 1), revised Nov 2005.
    6. Yeh, Kuo-chun & Ho, Tai-kuang, 2011. "ERM crisis in retrospect: What if a European central bank had been in existence before 1992?," Economic Modelling, Elsevier, vol. 28(4), pages 1526-1535, July.
    7. Gonzales-Eiras, Martín & Niepelt, Dirk, 2004. "Sustaining Social Security," Seminar Papers 731, Stockholm University, Institute for International Economic Studies.
    8. Krause Montalbert, Stefan, 2016. "Better off without the euro? Evaluating monetary policy and macroeconomic performance for the u.k. and sweden," Revista de Ciencias Económicas, Instituto de Investigaciones en Ciencias Económicas, Universidad de Costa Rica, vol. 34(2), December.
    9. Marçal, Emerson Fernandes, 2014. "Desalinhamentos Cambiais, Interdependência, Crises, Guerras cambiais: Uma avaliação empírica," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(2), June.
    10. Mutl, Jan, 2009. "Consistent Estimation of Global VAR Models," Economics Series 234, Institute for Advanced Studies.
    11. Brzoza-Brzezina, Michał & Makarski, Krzysztof & Wesołowski, Grzegorz, 2014. "Would it have paid to be in the eurozone?," Economic Modelling, Elsevier, vol. 41(C), pages 66-79.
    12. M. Hashem Pesaran & Ron Smith, 2006. "Macroeconometric Modelling With A Global Perspective," Manchester School, University of Manchester, vol. 74(s1), pages 24-49, September.
    13. repec:fgv:epgrbe:v:68:n:2:a:5 is not listed on IDEAS

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    More about this item

    Keywords

    Global VAR (GVAR); Counterfactual Analysis; euro.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • 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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