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Brexit or Euro for the UK? Evidence from Panel Data

Petros E. Ioannatos ()
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Petros E. Ioannatos: Kettering University

Comparative Economic Studies, 2021, vol. 63, issue 1, No 4, 117-138

Abstract: Abstract An alternative course to Brexit for the UK is evaluated. The purpose of the study is to determine whether the UK would have been better off had, instead of Brexit, remained in the EU and joined the Eurozone. The model specification is based on the neoclassical theory of growth extended to include human capital accumulation. Counterfactual analysis in terms of the difference-in-differences methodology is applied to evaluate the effect in UK’s per capita income if the UK had joined the Eurozone when the Eurozone was formed. The dataset is a balanced panel of annual observations for fifteen countries and covers the period from 1980 to 2017. The analysis reveals that had the UK joined the Eurozone, UK’s per capita income would have been 15.48% higher on the average for the period after the formation of the Eurozone. This effect increases to 24.98% if Eurozone’s less performing economies of the southern periphery are excluded from the analysis. The study shows that Brexit is a move toward the wrong direction. The UK should have sought further integration with the EU in terms of presence in the Eurozone than pursue Brexit and leave the EU.

Keywords: Brexit; European Union; Euro; Eurozone; Neoclassical growth theory; Panel data; Natural experiment; Difference-in-differences; Fixed effects (search for similar items in EconPapers)
JEL-codes: C54 F15 F17 F33 F36 F60 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1057/s41294-020-00119-y

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