This paper presents an estimated two-country dynamic stochastic general equilibrium (DSGE) model linking the United Kingdom (UK) and the euro area (EA). The model includes imperfect exchange rate pass-through, external habit formation, producer and importer sticky prices à la Calvo, incomplete...

Given the importance of a high degree of homogeneity between the members states of the EMU, one of the research questions that this paper aims at answering is in determining the degree of heterogeneity between the UK and the EA. Furthermore, it is analyzed how an hypothetical membership of the...