An Estimated Two-Country DSGE Model: losses from UK membership in EMU
Given the importance of a high degree of homogeneity between the members states of the EMU, one of the research questions that this paper aims at answering is in determining the degree of heterogeneity between the UK and the EA. Furthermore, it is analyzed how an hypothetical membership of the UK affects the volatility of output and inflation in both economies. In addition, it is investigated whether changes in the objective function of the ECB, or more or less active fiscal policy, can decrease the losses of a membership. Overall, the results point at a high degree of homogeneity in de conduct of monetary and fiscal policy in both economies. However, results also point at heterogeneity in consumer behavior. While a membership would increase UK losses significantly, results show that automatic stabilizers can play an important role in reducing these losses.
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