Discussion paper

DP15635 North and South: A Regional Model of the UK

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.

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Citation

Minford, P, Y Gai and D Meenagh (eds) (2021), “DP15635 North and South: A Regional Model of the UK”, CEPR Press Discussion Paper No. 15635. https://cepr.org/publications/dp15635