Exchange Rates and Consumer Prices: Evidence from Brexit

50 Pages Posted: 17 Dec 2019

See all articles by Holger Breinlich

Holger Breinlich

University of Surrey - School of Economics; Centre for Economic Policy Research (CEPR); London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Elsa Leromain

London School of Economics & Political Science (LSE) - London School of Economics

Dennis Novy

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); Centre for Economic Performance (CEP); CESifo (Center for Economic Studies and Ifo Institute)

Thomas Sampson

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.

Keywords: Brexit, exchange rate pass-through, import costs, inflation

JEL Classification: E31, F15, F31

Suggested Citation

Breinlich, Holger and Leromain, Elsa and Novy, Dennis and Sampson, Thomas, Exchange Rates and Consumer Prices: Evidence from Brexit (December 2019). CEPR Discussion Paper No. DP14176, Available at SSRN: https://ssrn.com/abstract=3504605

Holger Breinlich (Contact Author)

University of Surrey - School of Economics ( email )

Guildford, Surrey GU2 7XH
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Elsa Leromain

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

Dennis Novy

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 (0) 2476150046 (Phone)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/novy/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Thomas Sampson

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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