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North and South: A Regional Model of the UK

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We set up a two-region model to study the policy challenge of bringing the North s income up to the level of the South in the UK. The model focuses on labour costs as the driver of output gains through the international competitiveness channel. The empirical results show that the regional model behaviour fits the regional UK data behaviour over the period of 1986Q1 and 2019Q4, using the demanding Indirect Inference method. We also carry out a Monte Carlo power test, which shows the empirical results we obtain are trustworthy and can provide us a reliable guide for policy reform.The results suggest that in response to tax cuts and labour market reforms GDP in the North increases almost twice as much as GDP in the South. Given that a broad programme of tax cuts and regulatory reform would more than pay for itself in the long run, it must be considered as a highly attractive political agenda.

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  • Minford, Patrick & Gai, Yue & Meenagh, David, 2020. "North and South: A Regional Model of the UK," Cardiff Economics Working Papers E2020/14, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2020/14
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    1. Vo Le & David Meenagh & Patrick Minford & Michael Wickens, 2010. "Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and the EU Using Indirect Inference," Open Economies Review, Springer, vol. 21(1), pages 23-44, February.
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    12. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 533-563.
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    14. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2011. "How much nominal rigidity is there in the US economy? Testing a new Keynesian DSGE model using indirect inference," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2078-2104.
    15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    16. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti, 2010. "Can a real business cycle model without price and wage stickiness explain UK real exchange rate behaviour?," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1131-1150, October.
    17. David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2019. "Testing DSGE Models by Indirect Inference: a Survey of Recent Findings," Open Economies Review, Springer, vol. 30(3), pages 593-620, July.
    18. Patrick Minford & Yongdeng Xu, 2018. "Classical or Gravity? Which Trade Model Best Matches the UK Facts?," Open Economies Review, Springer, vol. 29(3), pages 579-611, July.
    19. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
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    1. Minford, Patrick & Xu, Yongdeng, 2024. "Indirect Inference- a methodological essay on its role and applications," Cardiff Economics Working Papers E2024/1, Cardiff University, Cardiff Business School, Economics Section.

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    More about this item

    Keywords

    Regional study; DSGE model; Policy implication; Indirect Inference;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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