DP15635 North and South: A Regional Model of the UK

Author(s): Yue Gai, David Meenagh, Patrick Minford
Publication Date: January 2021
Date Revised: January 2021
Keyword(s): DSGE model, indirect inference, Policy implication, Regional study
JEL(s): E32, E60, P48
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15635

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. 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.