Measuring the Correlation of Shocks Between the UK and the Core of Europe

This paper considers the question of the symmetry of inflation and GDP shocks between the UK and the three major European EMU countries. It applies a relatively new technique, the orthogonal GARCH model, which allows us to calculate a complete time varying correlation matrix for these four countries. We can then examine the way the conditional correlation of shocks between the UK and the other European countries ahs been evolving over time. Our overall results Show that the shocks, which hit the UK, are now broadly symmetrical with France and Italy but that Germany seems to exhibit very low correlation with any of the other three countries.