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

Author

Listed:
  • Broadbent, Ben
  • DiPace, Federico
  • Drechsel, Thomas
  • Harrison, Richard
  • Tenreyro, Silvana

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 characterize these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualized 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 the 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 materializes. The negative news about tradable sector productivity also lead 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 Brexit simulations, we provide a quantitative analysis of the UK business cycle.

Suggested Citation

  • Broadbent, Ben & DiPace, Federico & Drechsel, Thomas & Harrison, Richard & Tenreyro, Silvana, 2019. "The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom," CEPR Discussion Papers 13993, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13993
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    References listed on IDEAS

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    More about this item

    Keywords

    Brexit; Exchange Rate Adjustment; growth; productivity; Tradable Sector; Trade; 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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