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The Costs of Economic Nationalism: Evidence from the Brexit Experiment

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  • Born, Benjamin
  • Müller, Gernot
  • Schularick, Moritz
  • SedlÃ¡Ä ek, Petr

Abstract

Economic nationalism is on the rise. What are the costs of cutting back international economic integration and rising policy uncertainty? We use the unexpected outcome of the Brexit vote in June 2016 as a natural macroeconomic experiment to study the costs of economic disintegration and their causes. As a methodological innovation, we propose a novel combination of synthetic control methods to identify the output loss caused by the Brexit vote, conjoined with an expectations-augmented vector autoregression to understand its drivers. Using the synthetic control, we first show that forward looking households and businesses have lowered spending in response to the Brexit vote, causing an output loss of close to 2 percent. Decomposition of the VAR estimates shows that shocks to economic policy uncertainty and growth expectations in the quarter following the Brexit vote explain almost the entire output loss. While higher uncertainty accounts for much of the initial output drop, the economic costs increase over time because of a downward revision of output growth expectations. Overall, both uncertainty and growth expectations account for about one half of the total economic costs of the Brexit vote. Linking quasi-experimental identification to structural time series variance decomposition, our study exposes not only the aggregate costs of the UK’s expected economic disintegration from Europe but also specifies the channels through which the Brexit vote affected the macroeconomy.

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  • Born, Benjamin & Müller, Gernot & Schularick, Moritz & SedlÃ¡Ä ek, Petr, 2017. "The Costs of Economic Nationalism: Evidence from the Brexit Experiment," CEPR Discussion Papers 12454, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12454
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    More about this item

    Keywords

    Brexit; European union; Policy uncertainty; Synthetic control method;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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