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North and South: A Regional Model of the UK

Patrick Minford, Yue Gai Orcid Logo, David Meenagh

Open Economies Review, Volume: 33, Issue: 3, Pages: 565 - 616

Swansea University Author: Yue Gai Orcid Logo

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Abstract

We set up a two-region model to study the policy challenge of bringing the North’s income up to the level of the South in the UK. The model focuses on labour costs as the driver of output gains through the international competitiveness channel; and on tax/regulative costs to entrepreneurs as the dri...

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Published in: Open Economies Review
ISSN: 0923-7992 1573-708X
Published: Springer Science and Business Media LLC 2022
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa58878
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Abstract: We set up a two-region model to study the policy challenge of bringing the North’s income up to the level of the South in the UK. The model focuses on labour costs as the driver of output gains through the international competitiveness channel; and on tax/regulative costs to entrepreneurs as the driver of productivity growth. The empirical results show that the regional model behaviour fits the regional UK data behaviour over the period of 1986Q1 and 2019Q4, using the demanding Indirect Inference method. We also carry out a Monte Carlo power test, which shows the empirical results we obtain are trustworthy and can provide us a reliable guide for policy reform. The results suggest that in response to tax cuts and labour market reforms GDP in the North increases almost twice as much as GDP in the South. Given that a broad programme of tax cuts and regulatory reform would more than pay for itself in the long run, it must be considered as a highly attractive political agenda.
Keywords: Regional study; DSGE model; Policy implication; Indirect Inference
College: Faculty of Humanities and Social Sciences
Funders: Not applicable.
Issue: 3
Start Page: 565
End Page: 616