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How the Economics Profession Got It Wrong on Brexit

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  • Ken Coutts
  • Graham Gudgin
  • Jordan Buchanan

Abstract

A wide range of reports from official bodies and academics have estimated the impact of Brexit. These influenced the outcome of the Brexit referendum and remain influential in informing views on the potential long-term consequences of a range of Brexit trade arrangements. This paper builds on a previous CBR working paper in examining the most influential of these reports, from HM Treasury, and the OECD. In this paper the work of the LSE’s Centre for Economic Performance is also included. Each of these reports base their analyses either on gravity models or a computable general equilibrium models. The addition in this paper a review of the link between trade and productivity, which plays an important role in these reports. We also examine three reports which take a direct approach to measuring the impact by assessing the likely prices increases across a large range of commodities due to the imposition of tariff and non-tariff barriers, and using elasticities to estimate the potential changes in the volume of trade. We find important flaws in both the application of gravity model results to a Brexit context, and in the knock-on impacts from trade to productivity. The flaws always have the result of exaggerating the negative impact of Brexit. The direct approaches involve partial rather than full equilibrium models but provide an important check on results from more complex models. However, the choice of elasticities can result in widely different results from ostensibly similar approaches. The paper starts by looking at the view, supported in the academic literature and widely repeated in the financial media, that accession to the EEC in 1973 improved the economic growth performance of the UK. The evidence suggests that this view is incorrect.

Suggested Citation

  • Ken Coutts & Graham Gudgin & Jordan Buchanan, 2018. "How the Economics Profession Got It Wrong on Brexit," Working Papers wp493, Centre for Business Research, University of Cambridge.
  • Handle: RePEc:cbr:cbrwps:wp493
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    References listed on IDEAS

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    More about this item

    Keywords

    Brexit; Gravity Model; computable general equilibrium; HM Treasury; IMF; trade; macroeconomic forecasts; OECD;

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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