Working Paper: CEPR ID: DP15635
Authors: Patrick Minford; Yue Gai; David Meenagh
Abstract: We set up a two-region model to study the policy challenge of bringing the North’s incomeup to the level of the South in the UK. The model focuses on labour costs as the driver ofoutput gains through the international competitiveness channel. The empirical results showthat the regional model behaviour fits the regional UK data behaviour over the period of1986Q1 and 2019Q4, using the demanding Indirect Inference method. We also carry out aMonte Carlo power test, which shows the empirical results we obtain are trustworthy and canprovide us a reliable guide for policy reform. The results suggest that in response to tax cutsand labour market reforms GDP in the North increases almost twice as much as GDP in theSouth. Given that a broad programme of tax cuts and regulatory reform would more thanpay for itself in the long run, it must be considered as a highly attractive political agenda.
Keywords: regional study; DSGE model; policy implication; indirect inference
JEL Codes: E32; E60; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax cuts and labor market reforms (E69) | GDP in the north (E20) |
| tax cuts and labor market reforms (E69) | GDP in the south (E20) |
| GDP in the north (E20) | GDP in the south (E20) |
| tax cuts and labor market reforms (E69) | GDP in the north is almost twice as much as that in the south (O55) |