Estimating the Trade and Welfare Effects of Brexit: A Panel Data Structural Gravity Model

35 Pages Posted: 27 Feb 2018

See all articles by Harald Oberhofer

Harald Oberhofer

Vienna University of Economics and Business - Department of Economics; Austrian Institute of Economic Research (WIFO)

Michael Pfaffermayr

University of Innsbruck - Department of Economics; Austrian Institute of Economic Research

Date Written: January 23, 2018

Abstract

This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. The suggested Constrained Poisson Pseudo Maximum Likelihood Estimator exhibits some useful properties for trade policy analysis and allows to obtain estimates and confidence intervals which are consistent with structural trade theory. Assuming different counterfactual post-Brexit scenarios, our main findings suggest that UKs (EUs) exports of goods to the EU (UK) are likely to decline within a range between 7.2% and 45.7% (5.9% and 38.2%) six years after the Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic goods trade and trade with third countries, inducing a decline in UKs real income between 1.4% and 5.7% under the hard Brexit scenario. The estimated welfare effects for the EU are negligible in magnitude and statistically not different from zero.

Keywords: constrained poisson pseudo maximum likelihood estimation, panel data, international trade, structural gravity estimation, trade policy, Brexit

JEL Classification: F100, F150, C130, C500

Suggested Citation

Oberhofer, Harald and Pfaffermayr, Michael, Estimating the Trade and Welfare Effects of Brexit: A Panel Data Structural Gravity Model (January 23, 2018). CESifo Working Paper Series No. 6828, Available at SSRN: https://ssrn.com/abstract=3129951

Harald Oberhofer

Vienna University of Economics and Business - Department of Economics ( email )

Welthandelsplatz 1
A-1020 Vienna
Austria

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

Michael Pfaffermayr (Contact Author)

University of Innsbruck - Department of Economics ( email )

Universitaetsstrasse 15
A-6020, Innsbruck
Austria
+43 512 507 7359 (Phone)

HOME PAGE: http://homepage.uibk.ac.at/~c43236/

Austrian Institute of Economic Research ( email )

P.O. Box 91
Wien, A-1103
Austria
+43 1 798 26 01-253 (Phone)
+43 1 798 93 86 (Fax)

HOME PAGE: http://www.wifo.ac.at/Michael.Pfaffermayr/

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