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

Ben Broadbent, Federico Di Pace, Thomas Drechsel (), Richard Harrison () and Silvana Tenreyro ()
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Ben Broadbent: Bank of England

No 1916, Discussion Papers from Centre for Macroeconomics (CFM)

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 characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised 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 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 materialises. The negative news about tradable sector productivity also leads 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 analysis, we provide a quantitative analysis of the UK business cycle.

Keywords: Brexit; Small open economy; Productivity; Tradable sector; UK economy (search for similar items in EconPapers)
JEL-codes: E13 E32 F17 F47 O16 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2019-08
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-int, nep-mac and nep-opm
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Working Paper: The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom (2019) Downloads
Working Paper: The Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom (2019) Downloads
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