What Will Brexit Mean for the British and Euro-Area Economies? A Model-Based Assessment of Trade Regimes

65 Pages Posted: 22 Feb 2018

Date Written: January 29, 2018

Abstract

This paper evaluates the macroeconomic effects on the UK and the euro area of an increase in trade tariffs associated with Brexit, by simulating a dynamic general equilibrium model of the UK, the euro area, and the rest of the world (RW). Our results are as follows: first, the imposition of tariffs reduces UK exports and economic activity by a non-negligible amount; second, the macroeconomic costs for the UK are reduced if it decides unilaterally not to increase tariffs on imports from the euro area and to reduce those on imports from the RW; third, the macroeconomic costs are particularly high if the lower UK trade openness resulting from the imposition of tariffs reduces the UK’s total factor productivity; and fourth, Brexit has negative, but quite limited, effects on euro-area economic activity.

Keywords: Brexit, DSGE models, tariffs

JEL Classification: C54, F13, F15

Suggested Citation

Pisani, Massimiliano and Vergara Caffarelli, Filippo, What Will Brexit Mean for the British and Euro-Area Economies? A Model-Based Assessment of Trade Regimes (January 29, 2018). Bank of Italy Temi di Discussione (Working Paper) No. 1163, Available at SSRN: https://ssrn.com/abstract=3127550 or http://dx.doi.org/10.2139/ssrn.3127550

Massimiliano Pisani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Filippo Vergara Caffarelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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