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The Costs of Economic Nationalism: Evidence from the Brexit Experiment

Benjamin Born, Gernot Müller, Moritz Schularick and Petr Sedlacek ()

No 6780, CESifo Working Paper Series from CESifo

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.

Keywords: economic nationalism; Brexit; natural experiment; synthetic control method; anticipation effects; economic policy uncertainty; expectations-augmented vector autoregression (search for similar items in EconPapers)
JEL-codes: E65 F13 F42 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-eec, nep-int and nep-mac
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Journal Article: The Costs of Economic Nationalism: Evidence from the Brexit Experiment (2019) Downloads
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