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Choosing the Regime in an Uncertain World, the UK and Monetary Union

Author

Listed:
  • Barrell, Ray

    (NIESR)

  • Ian Hurst
  • Tatiana Kirsanova

Abstract

The UK has to take a decision on EMU membership at some point, and the costs and benefits have to be evaluated. Different policy frameworks result in differing outcomes for the means and variances of economic variables such as inflation, output, and nominal and real exchange rates and interest rates. Changing the level of uncertainty in the economy may change the equilibrium level of output and investment. Hence membership of EMU has to be evaluated in the light of its impact on the volatility of target variables and on the impact of volatility on the level of output and welfare. We discuss a theoretical framework within which we can discuss these issues, and we undertake stochastic simulation on a large, New Keynesian model including all the European economies in order to evaluate the effects of membership on the level and volatility of output. Our experiments suggest that membership of EMU would reduce volatility and as a result raise the sustainable level of output and employment in the UK.

Suggested Citation

  • Barrell, Ray & Ian Hurst & Tatiana Kirsanova, 2003. "Choosing the Regime in an Uncertain World, the UK and Monetary Union," Royal Economic Society Annual Conference 2003 16, Royal Economic Society.
  • Handle: RePEc:ecj:ac2003:16
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    More about this item

    Keywords

    EMU; exchange rate regimes; uncertainty and investment; UK membership;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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