Working Paper: CEPR ID: DP3602
Authors: David Meenagh; Patrick Minford; Bruce Webb
Abstract: Stochastic simulations are used on the Liverpool Model of the UK to assess the effect of macroeconomic stability of the UK adopting the Euro. Instability increases substantially, particularly for inflation and real interest rates. A key factor is the extent of the Euro's instability against the dollar; by adopting a regional currency the UK imports this source of shocks, as well as losing its control of interest rates. The results are not highly sensitive to changes in assumptions about the degree of labour market flexibility, the use of fiscal policy, and increased convergence of monetary transmission.
Keywords: Business Cycle; Euro; Exchange Rate Instability; Floating; Single Currency; Transmission Mechanisms
JEL Codes: E42; E53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adopting the euro (F36) | increased instability in inflation (E31) |
| adopting the euro (F36) | increased instability in real interest rates (E43) |
| euro's instability against the dollar (F31) | increased instability in inflation (E31) |
| adopting the euro (F36) | loss of control over domestic interest rates (E49) |
| adopting the euro (F36) | impact on UK’s monetary policy (E52) |