Open Economy Models: an empirical investigation for the UK
Background:
In open economy macroeconomics two main areas of research currently claim urgent attention. The first is the development of micro-founded ('second generation') models based on the modernised Mundell-Fleming framework to replace the main ('first generation') models in current policy use. The second is the formulation of optimal monetary policy in such models. There has been much activity on this within the framework of the New neo-Keynesian Synthesis models of the closed economy and there are increasing attempts to extend this to the open economy.
The importance of these two areas is reflected against an emerging policy background in which 'open economy effects' have interfered with the successful prosecution of monetary policy. The euro has been set up but with significant non-participants inside Europe and enjoying a fair degree of instability against the dollar and internal asymmetries that have caused problems. The conduct of monetary policy for domestic ends under floating exchange rates and the relatively stable behaviour of output within the OECD. Despite an apparently orthodox approach to inflation, deflation has also emerged in japan where monetary policy aims appear to have been subordinated at times in the 1990s to exchange rate aims. Further research in these two areas is required to throw more light on these policy concerns.
The objective of our research is:
1. To develop an open economy second generation model of the UK, via estimation and empirical testing
2. To embed this in a 3-economy 'world model' consisting of the UK, the euro-zone and the rest of the world (the 'dollar zone')
3. To consider optimal monetary policy within this 3-economy model, including the issue of whether the exchange rate should be targeted to reduce exchange rate fluctuations
4. To 'compare and contrast' the implications of these models with those of the first generation.
Working Papers:
WEF0028
Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?
David Meenagh, Patrick Minford, Eric Nowell, Prakriti Sofat, Naveen Srinivasan
July 2007
Researchers:
Prof Patrick Minford
Cardiff University
Prof Harris Dellas
University of Bonn
Prof Michael Wickens
University of York
Contact:
Prof Patrick Minford
Cardiff Business School
Cardiff University
Aberconwy Building
Colum Drive
Cardiff
CF10 3EU
Tel: 0292 087 5486
email: MinfordP@cardiff.ac.uk
Duration of Research:
April 2006 - March 2008