TY  - JOUR
AU  - DiCecio, Riccardo
AU  - Nelson, Edward
TI  - Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14894
PY  - 2009
Y2  - April 2009
DO  - 10.3386/w14894
UR  - http://www.nber.org/papers/w14894
L1  - http://www.nber.org/papers/w14894.pdf
N1  - Author contact info:
Riccardo DiCecio
Federal Reserve Bank of St. Louis
Research Division
P.O. Box 442
St. Louis, MO 63166-0442
Tel: 314-444-8806
Fax: 314-444-8731
E-Mail: Riccardo.DiCecio@stls.frb.org

Edward Nelson
Federal Reserve Board
Mail Stop 76, Monetary Affairs
20th and C Streets, N.W.
Washington, DC 20551
E-Mail: Edward.M.Nelson@frb.gov
M1  - published as Riccardo DiCecio, Edward Nelson. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," in Alberto Alesina and Francesco Giavazzi, editors, "Europe and the Euro" University of Chicago Press (2010)

M3  - presented at "Europe and the Euro", October 17-18, 2008
AB  - 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.
ER  -