The Costs of Economic Nationalism: Evidence from the Brexit Experiment*

Abstract

Economic nationalism is on the rise, but at what cost? We study this question using the unexpected outcome of the Brexit referendum vote as a natural macroeconomic experiment. Employing synthetic control methods, we first show that the Brexit vote has caused a UK output loss of 1.7% to 2.5% by year-end 2018. An expectations-augmented VAR suggests that these costs are, to a large extent, driven by a downward revision of growth expectations in response to the vote. Linking quasi-experimental identification to structural time-series estimation allows us not only to quantify the aggregate costs but also to understand the channels through which expected economic disintegration impacts the macroeconomy.

The Global Impact of Brexit Uncertainty

“…Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019). 21 Figure 8 shows a binned added-variable plot of firm-level capital investment (I i,t+1 /K i,t ) 21 Bloom et al (2019) points out that Brexit presents a persistent uncertainty shock that should have a heterogeneous impact on UK firms; the impact depends on firms' prior exposure to the EU.…”

“…4 Papers documenting a negative impact of Brexit on UK investments, employment, wages, trade, lending, and competition include Born et al (2019); Berg et al (2019); Van Reenen (2016); Sampson (2017);Breinlich et al (2018); Davies and Studnicka (2018); Dhingra et al (2017); Graziano et al (2018); Garetto et al (2019); Costa et al (2019); McGrattan and Waddle (2017); Steinberg (2019). 5 Campello et al (2018) document the investment and hiring e↵ects of Brexit on a sample of US firms exposed to the UK economy.…”

The Global Impact of Brexit Uncertainty

“…We turn next to the asset pricing implications of the June 23, 2016 referendum to leave the EU. The outcome of this vote was a complete surprise to most observers (Fisman and Zitzewitz, 2019); polling in the preceding months had persistently shown a "Remain" victory (Born et al, 2019). Famously, the British politician Boris Johnson, then one of the leading figures of the Leave campaign, went to bed resigned to losing the vote only to wake up to the sound of demonstrators protesting the vote's outcome at his private residence.…”

On the Methodology of Studying Differentiated (Dis)integration: Or How the Potential Outcome Framework Can Contribute to Evaluating the Costs and Benefits of Opting In or Out

“…The SCM however, builds on the stable unit treatment value assumption, which assumes that there are no spillover effects between units (Rubin, 1980). Nevertheless, established ways of applying a POF perspective via an SCM may help to estimate the economic costs of Brexit (Born et al, 2016). Figure 1 summarizes the main steps of the SCM.…”