Uncertain Times: The Macroeconomic Effects of Brexit

Myrto Oikonomou

No 925, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Uncertainty indexes spiked in the aftermath of the Brexit referendum, and remained elevated ever since. This paper studies the consequences of the Brexit-induced uncertainty on trade and labor market outcomes. We consider two scenarios that can resolve the uncertainty over the trade regime. The first is the World Trade Organization agreement, whereby the United Kingdom would receive the Most Favored Nation clauses from the European Union, face a substantial increase in trade barriers, and regain full control on immigration policies. The second scenario is a Norway-like arrangement, which corresponds to a minimal increase in trade barriers but no changes in labor market policies. The new status quo will determine the long-run level of output and employment after the Brexit transition is complete. The interplay between frictions in the goods and labor market generates a strong amplification mechanism for the propagation of Brexit-related uncertainty and brings the effects of Brexit on labor market variables to the front of the debate.

Date: 2020-11-06
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