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Faculty of Economics

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Gudgin, G., Coutts, K., Gibson, N. and Buchanan, J.

The Macro-economic impact of Brext: using the CBR Macro-economic Model of the UK Economy (UKMOD)

Journal of Self-Governance and Management Economics

Vol. 6(2) pp. 7-49 (2018)

Abstract: This working paper uses the new Centre for Business Research (CBR) macro-economic model of the UK economy to investigate possible futures following the referendum decision to leave the EU. The model was originally developed in response to the failure of academic and commercial economic forecasters to foresee or understand the economic crisis of 2008–9. The paper briefly explains and describes some of its key features. Since Brexit is a unique event with no precedent it is not possible to do a normal forecast in which a few assumptions are made about a limited range of exogenous variables. The best that can be done is to construct scenarios and two are presented here. The difficult part is to decide what scale of adjustment is needed to reflect the likely realities of Brexit. Gravity model analysis by HM Treasury of the potential impact of various outcomes for trade outside the EU is examined and found wanting. The gravity model approach is replicated and shows that the impact of EU membership on the level of exports to the EU is much smaller for the UK than for other EU members. The implication is that the impact of EU membership on UK trade is much less than suggested by the Treasury. In addition, the actual experience of UK export performance is examined for a long period including both pre- and post-accession years. This augments the gravity model results in suggesting a more limited impact of EU membership. While we include a scenario based on Treasury assumptions, a more realistic, although in our view still pessimistic, scenario assumes a much lower level of the trade loss than that of the Treasury. The results are presented through comparing these scenarios with a pre-referendum forecast. In the milder Brexit scenario, there is a minor loss of GDP by 2025 (around 1%) but no loss of per capita GDP, and also less unemployment but more inflation. In the more severe, Treasury-based scenario the loss of GDP is nearer 4% (2.5% for per capita GDP), inflation is higher and the advantage in unemployment less.

Author links: Ken Coutts  

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