Free DP Download 20 September 2019 - ASSESSING THE EFFECT OF BREXIT ON THE UK ECONOMY

Friday, September 20, 2019

THE BREXIT VOTE, PRODUCTIVITY GROWTH AND MACROECONOMIC ADJUSTMENTS IN THE UNITED KINGDOM
Ben Broadbent, Federico DiPace, Thomas Drechsel, Richard Harrison, Silvana Tenreyro  
CEPR DP No. 13993 | 13 September 2019

The UK economy has experienced significant macroeconomic changes following the 2016 referendum on whether to remain or leave the European Union. A new CEPR study by Ben Broadbent Federico DiPace, Thomas Drechsel, Richard Harrison and Silvana Tenreyro shows that many of the effects of the referendum result can be thought of as news about a future slowdown in productivity growth in the tradable sector. 

The results show that while overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in the tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector; tradable output growth rises and net exports increase.

These developments reverse after the productivity decline in the tradable sector materialises. The negative news about productivity in the tradable sector also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. 

While Brexit encompasses a variety of economic mechanisms, this study provides a concise framework in which macroeconomic adjustments to this momentous historical event can be interpreted.


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