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Question 1 In their paper on UK monetary policy and EMU entry Kontolemis and Samiei 2000 begin by observing the differences in the business cycles between the EU economies and that of the UK The cycles in the UK are different from the continent because of different policies or exogenous variables different transmission mechanisms and different idiosyncratic shocks Kontolemis and Samiei 2000 p 3 For example the UK business cycles tend to be a bit more volatile and long lasting in comparison to the continent The 1990-93 recession lasted eight quarters in the UK compared to four in Germany and five in Italy The variance of rates of GDP growth is significantly higher in the UK than in France Germany and Italy After noting the differences in the economies between the UK and the rest of Europe Kontolemis and Samiei used VAR models to try to see if the UK business cycles could become more synchronized with Europe if they allowed for the European Central Bank to run their monetary policy Kontolemis and Samieis monetary policy model used six variables money GDP domestic nominal interest rates foreign nominal interest rate real effective exchange rate and inflation They estimated a system of cointegrated structural VARs in order to assess the contributions of monetary policy and the exchange rate to the business cycle in the UK Kontolemis and Samiei 2000 identified three relationships and tested to see if they were valid 1 In the money market the exogenous stock of money is equal to long-run money demand which is expressed as a function of income and the interest rate 2 In order for there to be perfect capital mobility there must be equal domestic and foreign interest rates 3 How the actual output of a country will deviate from its potential is determined by the interest rate and the real effective exchange rate Kontolemis and Samiei p 9 The third objective of Kontolemis and Samieis paper is
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