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    What if the UK or Sweden had joined the Euro in 1999? An empirical evaluation using a global VAR

    Pesaran, M.H. and Smith, L.V. and Smith, Ron P. (2007) What if the UK or Sweden had joined the Euro in 1999? An empirical evaluation using a global VAR. International Journal of Finance and Economics 12 (1), pp. 55-87. ISSN 1076-9307.

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    Abstract

    This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same Lis those of the euro area. We derive conditional probability distributions for the difference between the future realizations of variables of interest (e.g. UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realizations without the restrictions. The robustness of the results can be evaluated by also conditioning oil variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees et al. (J. Appl. Econometrics, 2007, forthcoming). 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 when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.

    Metadata

    Item Type: Article
    Additional Information: Full text cannot be included because of restrictions imposed by the publisher. Full text copyright 2007 John Wiley & Sons, Ltd.
    Keyword(s) / Subject(s): global VAR (GVAR), counterfactual analysis, UK, Sweden, entry to euro
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 14 Mar 2007
    Last Modified: 07 Dec 2016 09:11
    URI: http://eprints.bbk.ac.uk/id/eprint/471

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