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What will Brexit mean for the British and euro-area economies? A model-based assessment of trade regimes

Author

Listed:
  • Massimiliano Pisani

    () (Bank of Italy)

  • Filippo Vergara Caffarelli

    () (Bank of Italy)

Abstract

This paper evaluates the macroeconomic effects on the UK and the euro area of an increase in trade tariffs associated with Brexit, by simulating a dynamic general equilibrium model of the UK, the euro area, and the rest of the world (RW). Our results are as follows: first, the imposition of tariffs reduces UK exports and economic activity by a non-negligible amount; second, the macroeconomic costs for the UK are reduced if it decides unilaterally not to increase tariffs on imports from the euro area and to reduce those on imports from the RW; third, the macroeconomic costs are particularly high if the lower UK trade openness resulting from the imposition of tariffs reduces the UK’s total factor productivity; and fourth, Brexit has negative, but quite limited, effects on euro-area economic activity.

Suggested Citation

  • Massimiliano Pisani & Filippo Vergara Caffarelli, 2018. "What will Brexit mean for the British and euro-area economies? A model-based assessment of trade regimes," Temi di discussione (Economic working papers) 1163, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1163_18
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2018/2018-1163/en_tema_1163.pdf
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    References listed on IDEAS

    as
    1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
    2. Finicelli, Andrea & Pagano, Patrizio & Sbracia, Massimo, 2013. "Ricardian selection," Journal of International Economics, Elsevier, vol. 89(1), pages 96-109.
    3. Mulabdic,Alen & Osnago,Alberto & Ruta,Michele, 2017. "Deep integration and UK-EU trade relations," Policy Research Working Paper Series 7947, The World Bank.
    4. Barbara Annicchiarico & Fabio Di Dio & Francesco Felici & Francesco Nucci, "undated". "Macroeconomic Modelling and the Effects of Policy Reforms: an Assessment for Italy using ITEM and," Working Papers 1, Department of the Treasury, Ministry of the Economy and of Finance.
    5. Rita Cappariello, 2017. "Brexit: estimating tariff costs for EU countries in a new trade regime with the UK," Questioni di Economia e Finanza (Occasional Papers) 381, Bank of Italy, Economic Research and International Relations Area.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Rita Cappariello & Milan Damjanovic & Michele Mancini & Filippo Vergara Caffarelli, 2018. "EU-UK global value chain trade and the indirect costs of Brexit," Questioni di Economia e Finanza (Occasional Papers) 468, Bank of Italy, Economic Research and International Relations Area.
    2. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    3. Patrick Bisciari, 2019. "A survey of the long-term impact of Brexit on the UK and the EU27 economies," Working Paper Research 366, National Bank of Belgium.

    More about this item

    Keywords

    Brexit; DSGE models; tariffs;

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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