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

M. Hashem Pesaran · L. Vanessa Smith · Ron P Smith

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Monetary Policy and Economic Impact Global Financial Crisis and Policies European Monetary and Fiscal Policies

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.

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References

2004Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model 1983Forecasting and Conditional Projection Using Realistic Prior Distributions 2007Exploring the international linkages of the euro area: a global VAR analysis 1935Statistical Problems in Agricultural Experimentation 2008Zooming out: The trade effect of the euro in historical perspective 1999Conditional Forecasts in Dynamic Multivariate Models 1966Railroads and American Economic Growth.2008The Sustainability of Fiscal Policy in the United States

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