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Exchange Rates and Consumer Prices: Evidence from Brexit

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  • Novy, Dennis
  • Breinlich, Holger
  • Leromain, Elsa
  • Sampson, Thomas

Abstract

This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.

Suggested Citation

  • Novy, Dennis & Breinlich, Holger & Leromain, Elsa & Sampson, Thomas, 2019. "Exchange Rates and Consumer Prices: Evidence from Brexit," CEPR Discussion Papers 14176, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14176
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    Cited by:

    1. Breinlich, Holger & Leromain, Elsa & Novy, Dennis & Sampson, Thomas, 2020. "Voting with their money: Brexit and outward investment by UK firms," European Economic Review, Elsevier, vol. 124(C).
    2. Ana Venâncio & João Pereira dos Santos, 2021. "The effect of Brexit on British workers living in the EU," Working Papers REM 2021/0197, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    3. Han Lin & Tim Lloyd & Steve McCorriston, 2020. "An Odd Crisis: Covid‐19 and UK Food Prices," EuroChoices, The Agricultural Economics Society, vol. 19(3), pages 42-48, December.
    4. Xavier Jaravel, 2021. "Inflation Inequality: Measurement, Causes, and Policy Implications," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 599-629, August.
    5. Sergei Guriev & Elias Papaioannou, 2022. "The Political Economy of Populism," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 753-832, September.
    6. Dorn, David & Levell, Peter, 2021. "Trade and Inequality in Europe and the US," CEPR Discussion Papers 16780, C.E.P.R. Discussion Papers.
    7. Josh De Lyon & Swati Dhingra, 2020. "Covid-19 and Brexit: Real-time updates on business performance in the United Kingdom," CEP Covid-19 Analyses cepcovid-19-006, Centre for Economic Performance, LSE.
    8. Gouhari, Saeeda & Forrest, Alan & Roberts, Michaela, 2021. "Cost-effectiveness analysis of forest ecosystem services in mountain areas in Afghanistan," Land Use Policy, Elsevier, vol. 108(C).
    9. Freitag, Andreas & Lein, Sarah M., 2023. "Endogenous product adjustment and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 140(C).
    10. Halmai, Péter, 2020. "A dezintegráció gazdaságtana. A brexit esete [The economics of disintegration. The case of Brexit]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 837-877.
    11. Yohannes Ayele & L. Alan Winters, 2020. "How Do Exchange Rate Depreciations Affect Trade and Prices? A Survey and Lessons about UK Experience after June 2016," Working Paper Series 1420, Department of Economics, University of Sussex Business School.

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    More about this item

    Keywords

    Brexit; Exchange rate pass-through; Import costs; inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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