Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model

35 Pages Posted: 20 Apr 2009  

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division

Edward Nelson

Federal Reserve Bank of St. Louis - Research Division; Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom's monetary policy options using a structural open-economy model. We use the Erceg, Gust, and López-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.

Suggested Citation

DiCecio, Riccardo and Nelson, Edward, Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model (April 2009). NBER Working Paper No. w14894. Available at SSRN: https://ssrn.com/abstract=1391841

Riccardo DiCecio (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Edward Nelson

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8712 (Phone)
314-444-8731 (Fax)

Board of Governors of the Federal Reserve System ( email )

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