Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18941
Authors: 
Pesaran, Mohammad Hashem
Smith, L. Vanessa
Smith, Ron P.
Year of Publication: 
2005
Series/Report no.: 
CESifo Working Paper 1477
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 as those of the euro area. We derive conditional probability distributions for the difference between the future realisations 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 realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on 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, di Mauro, Pesaran and Smith (2005). 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.
Subjects: 
Global VAR (GVAR)
counterfactual analysis
UK and Sweden entry to Euro
JEL: 
C35
C32
F42
F15
E17
Document Type: 
Working Paper

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