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Modelling the long-run economic impact of leaving the European Union

Author

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  • Ebell, Monique
  • Hurst, Ian
  • Warren, James

Abstract

We model the long-term implications of leaving the EU for the UK economy using NiGEM, the National Institute's large scale structural global econometric model. We examine a scenario in which the UK has no free trade agreement with the EU, focusing on four key shocks: a permanent reduction in the size of the UK's export market share in EU member countries, an increase in tariffs, a permanent reduction in inward FDI flows and the repatriation of the UK's projected net contributions to the EU budget. We calibrate the size of the shocks on a synthesis of the academic evidence. We explain how each of these four shocks is implemented in NiGEM, as well as examining the key mechanisms by which they are propagated through the model. The export market share channel is the main mechanism by which leaving the EU leads to declines in GDP and consumption relative to the long-run baseline, accounting for a long-run decline in GDP of 2.1% relative to the baseline value, out of a total projected reduction in GDP relative to the baseline of 2.7%.

Suggested Citation

  • Ebell, Monique & Hurst, Ian & Warren, James, 2016. "Modelling the long-run economic impact of leaving the European Union," Economic Modelling, Elsevier, vol. 59(C), pages 196-209.
  • Handle: RePEc:eee:ecmode:v:59:y:2016:i:c:p:196-209
    DOI: 10.1016/j.econmod.2016.06.020
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    References listed on IDEAS

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    Keywords

    Free trade agreements; International trade; Foreign direct investment; NiGEM;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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