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Prepared by Julio Escolano.
See “Statement on EMU by the Chancellor of the Exchequer” to the House of Commons (27 October 1997), and the associated publication HM Treasury (1997).
For a discussion of wage flexibility in the United Kingdom, see the Selected Issues paper on “Wage Flexibility and EMU” in this volume.
See, for instance, paragraphs 19 and 24 below.
These issues are discussed further in paragraphs in Section G below.
Canzoneri et al. (1996) take 1970:Q1 to 1985:Q4 as the sample period (the period between the end of the Bretton Woods System and the beginning of the hardening of the ERM), in order to observe a regime of reasonably flexible exchange rates.
For example, Currie (1997) singles out this argument as one of the most significant in the view of many EMU proponents.
See “United Kingdom—Staff Report for the 1999 Article IV Consultation,” and the Selected Issues paper “Issues Relating to Inflation Targeting and the Bank of England’s Framework” in this volume.
Buiter (1997) compares the network externality associated with the use of a common currency to the externalities from adopting a common language, measurement system, or compatible software.
The increase in the net rate of return to investment would result from both increased gross return to business activities and lower borrowing rates, due to the elimination of transaction costs and the risk premium associated to exchange rate variability and other risks.
Discriminatory pricing of some products (e.g., cars) between the United Kingdom and other EU countries has recently raised concerns among consumer organizations and the authorities in the United Kingdom.
Buiter (1999a) estimates seigniorage revenue in the United Kingdom—defined as either the value of the annual increase in base money or the notional annual interest foregone on the stock of base money—at about 0.2 percent of GDP per annum. This estimate of both the average annual increase in the monetary base and the interest bill foregone corresponds to the average of the period 1994-1998.
Updated estimates based only on the EU-11 countries plus the United Kingdom indicate that the U.K. monetary base also represents about 9 percent of the joint amount and that the U.K. capital share in the ECB would be 15.7 of its joint capital.
HM Treasury (1997) draws similar conclusions based on 1995 data. Weaker trade integration with EMU also diminishes the potential gains from lower transaction costs and exchange rate variability.
In 1995, 66 percent of U.K. households owned their own homes compared to an EU average of 56 percent; mortgage debt in the United Kingdom was 57 percent of GDP compared to an EU average of 33 percent of GDP (HM Treasury (1997)).
This study is discussed below in greater detail.
In the last sample year (1995), the United Kingdom shows the lowest level of agreement with the TOCA criteria among the European economies.
Bayoumi and Eichengreen (1997) explain away the surprising and counter-intuitive result for France on the grounds that this country is large and relatively close by European standards, with trade representing a comparatively low share of its GDP.
In Artis and Zhang (1998b), this implies defining for each country a “distance” from Germany (or dissimilarity coefficient) measuring the degree by which their bilateral economic relation with Germany deviates from the TOCA criteria. The variables used to proxy the TOCA criteria are correlation in business cycle, volatility of bilateral exchange rate, correlation in interest rate cycle, bilateral trade (as percent of total trade), inflation differential, and labor market flexibility (measured by the relative ranking of a country’s employment protection legislation).
Artis, M. and W. Zhang (1998a) reaches very similar conclusions using fuzzy clustering analysis—a related, but different methodology.
Artis and Zhang (1998b) also finds evidence of two other non-European clusters in their sample: one comprises the United States and Canada, and the other only Japan.
In this study, the sample period for quarterly output data was 1960:1-1997:4 and the countries and economic areas considered were the United Kingdom, United States, Canada, France, Germany, Italy, the euro area, and North America.
See Bayoumi and Eichengreen (1996) and Buiter (1997). The latter, for example, points out that the standard identifying restriction that demand shocks have no long-run effects only makes sense for monetary policy shocks and not for (permanent) fiscal policy shocks. OECD (1999) also contains a discussion of VAR methods used in connection with defining criteria for EMU membership.
See the Selected Issues paper “Wage Flexibility and EMU” in this volume.