The Costs of Economic Nationalism: Evidence from the Brexit Experiment

36 Pages Posted: 6 Feb 2018

See all articles by Benjamin Born

Benjamin Born

Frankfurt School of Finance & Management gemeinnützige GmbH

Gernot J. Müller

University of Tuebingen - Department of Economics

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Petr Sedlacek

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

Economic nationalism is on the rise. What are the costs of cutting back international economic integration and rising policy uncertainty? We use the unexpected outcome of the Brexit vote in June 2016 as a natural macroeconomic experiment to study the costs of economic disintegration and their causes. As a methodological innovation, we propose a novel combination of synthetic control methods to identify the output loss caused by the Brexit vote, conjoined with an expectations-augmented vector autoregression to understand its drivers. Using the synthetic control, we first show that forward looking households and businesses have lowered spending in response to the Brexit vote, causing an output loss of close to 2 percent. Decomposition of the VAR estimates shows that shocks to economic policy uncertainty and growth expectations in the quarter following the Brexit vote explain almost the entire output loss. While higher uncertainty accounts for much of the initial output drop, the economic costs increase over time because of a downward revision of output growth expectations. Overall, both uncertainty and growth expectations account for about one half of the total economic costs of the Brexit vote. Linking quasi-experimental identification to structural time series variance decomposition, our study exposes not only the aggregate costs of the UK’s expected economic disintegration from Europe but also specifies the channels through which the Brexit vote affected the macroeconomy.

Keywords: economic nationalism, Brexit, natural experiment, synthetic control method, anticipation effects, economic policy uncertainty, expectations-augmented vector autoregression

JEL Classification: E650, F130, F420

Suggested Citation

Born, Benjamin and Müller, Gernot J. and Schularick, Moritz and Sedlacek, Petr, The Costs of Economic Nationalism: Evidence from the Brexit Experiment (June 2018). CESifo Working Paper Series No. 6780. Available at SSRN: https://ssrn.com/abstract=3118143

Benjamin Born (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Petr Sedlacek

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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