Designing and Choosing Macroeconomic Frameworks: The Position of the UK after Four Years of the Euro

Fiscal and monetary policy frameworks have become increasingly popular as disenchantment with active stabilization policy has increased. Frameworks need to be designed to achieve targets efficiently and stabilize the volatility of the economy. The current fiscal and monetary frameworks in the UK and the euro area can be improved. The UK economy went through major regime changes in the 1990s and as a result it has experienced more stable outcomes in the last few years. Whether the UK remains outside EMU or becomes a member, inflation, real interest rates, and the level of government borrowing would be similar. However, further gains to stability and hence to potential productivity are available if the UK becomes a member of EMU. The UK and the euro-area countries currently have economic cycles that are coherent, experiencing very similar cyclical positions. Although interest rates differ, it is clear that these small differences in rates have little impact on the cyclical position of these economies. In addition we find no evidence that output in the UK is excessively sensitive to changes in interest rates, at least when compared to the other large European countries. Copyright 2003, Oxford University Press.