Front Matter Page
European Department
Contents
I. Introduction
II. An Analytical Framework
A. Euro Entry as an Investment Decision: Full Convergence (Or Flexibility) and no Uncertainty
B. Imperfect Convergence (or Imperfect Flexibility)
C. Uncertainty and the Value of Waiting
III. The Five Tests and the Twelve Issues
A. Issue 1: How Should the Entry Decision Problem be Formulated?
B. Issue 2: What is the Return from Entry Under full Convergence or Flexibility?
C. Issue 3: What is the Cost of Delaying Entry Arising from the Time Discount Factor?
D. Issue 4: How Does the Shape of the Return Curve Change over Time?
E. Issue 5: How Convergent Is the U.K. Economy With Respect To the Euro-Area Average, in Terms of Both Idiosyncratic Shocks and Idiosyncratic Transmission Mechanism?
F. Issue 6: How Flexible Is the U.K. Economy and, Relatedly, How Much Flexibility Is Needed to Compensate for Imperfect Convergence?
G. Issue 7: What Is the Effect of Output Volatility on Average Output Growth?
H. Issue 8: What Is the Welfare Cost of Increased Output Volatility?
I. Issue 9: How Fast Is Endogenous Convergence?
J. Issue 10: How Much Can Be Gained In Terms Of Improved Convergence and Increased Flexibility as a Result of Waiting (as Reforms are Implemented)?
K. Issue 11: Is the case for No Entry Made Stronger by Current Idiosyncratic Shocks?
L. Issue 12: What Weight Should Be Given to the Value of More Information that Can Be Gathered with the Passage of Time?
IV. Conclusions
References
Appendixes
I. The Option Value of Delaying EMU Entry
II. Domestic and Foreign Direct Investment (FDI)
Boxes
1. Effects of European Economic and Monetary Union (EMU) on Trade and Growth
2. Consumption and the Housing Market
3. Quantifying the Welfare Cost of Output Volatility
4. Is the United Kingdom Currently Affected by an Idiosyncratic Shock?
Figures
1. The Relative Return Curve
2. Private Consumption Contribution to GDP Growth
3. Relative Contribution of Private Consumption to GDP Growth
4. Real House Prices and Consumption per Capita
5. Correlation Coefficients Between Private Consumption Growth and House Price Inflation, 1971–2001
6. Real House Prices
Appendix Figures
A1. France, Germany, and the United Kingdom: Ten-Year Benchmark Government Bond Yields
Tables
1. Implied Effect of Joining EMU
2. Selected Housing Market Features
Appendix Tables
A1. Inward Foreign Direct Investment (FDI) Flows, by Origin
A2. FDI Inflows into European Union (EU) “Out” Countries
A3. FDI Inflows from Outside the EU