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Choosing the regime: macroeconomic effects of UK entry into EMU

  • Ray Barrell

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    The UK has to decide whether to join the other members of the EU in a monetary union. This choice depends in part on the outturns for the economy inside and outside EMU. The UK has chosen to target inflation, and this can involve some 'price level drift', whilst the ECB emphasises 'Price Stability' and would plan to reverse the drift in the price level that might be caused by external shocks such as an increase in the oil price. This paper discusses the intellectual foundations of the ECB policy, which is rooted in German Ordoliberalism. It compares these ideas with the more Anglo-Saxon approach embedded in inflation targets. These regimes are then compared over the future using a large macro model (NiGEM) which includes descriptions of all the European economies. It is repeatedly subject to historically representative shocks. The effects of these shocks on the UK and Europe are compared with the UK in and out of EMU. Membership of EMU helps stabilise inflation and the price level in the UK, but leaves output more volatile. The differences depend on the rules in place and on the set of shocks applied to the model. The paper concludes with a discussion of the options available to the UK.

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    Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 174.

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    Date of creation: Jun 2000
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    Handle: RePEc:nsr:niesrd:174
    Contact details of provider: Postal: 2 Dean Trench Street Smith Square London SW1P 3HE
    Web page: http://niesr.ac.uk

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