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The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom

Author

Listed:
  • Ben Broadbent

    (Bank of England
    Centre for Macroeconomics (CFM))

  • Federico Di Pace

    (Bank of England)

  • Thomas Drechsel

    () (University of Maryland
    Centre for Macroeconomics (CFM))

  • Richard Harrison

    () (Bank of England
    Centre for Macroeconomics (CFM))

  • Silvana Tenreyro

    () (Bank of England
    London School of Economics (LSE)
    Centre for Macroeconomics (CFM)
    Centre for Economic Policy Research (CEPR))

Abstract

The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. 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 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 tradable sector productivity 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. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle.

Suggested Citation

  • Ben Broadbent & Federico Di Pace & Thomas Drechsel & Richard Harrison & Silvana Tenreyro, 2018. "The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom," Discussion Papers 1916, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1916
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    References listed on IDEAS

    as
    1. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
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    6. Christopher Erceg & Andrea Prestipino & Andrea Raffo, 2018. "The Macroeconomic Effect of Trade Policy," 2018 Meeting Papers 221, Society for Economic Dynamics.
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    9. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.
    10. Lombardo, Giovanni & Ravenna, Federico, 2012. "The size of the tradable and non-tradable sectors: Evidence from input–output tables for 25 countries," Economics Letters, Elsevier, vol. 116(3), pages 558-561.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom
      by Christian Zimmermann in NEP-DGE blog on 2019-09-29 01:05:34

    More about this item

    Keywords

    Brexit; Small open economy; Productivity; Tradable sector; UK economy;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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