To Be or Not to Be (In): The International Economic Effects of Brexit Uncertainty
Posted: 16 Mar 2020
Date Written: February 20, 2020
This paper evaluates the impact of Brexit-related uncertainty on the economies of the UK, EU, and the US. We propose a measure of Brexit uncertainty that has not been employed before in the literature. We first construct a binary variable by listing and selecting Brexit-related events according to their coverage in the front page of Financial Times. We subsequently employ the Qual VAR model of Dueker (2005) to transform this variable to a continuous latent variable that captures uncertainty on important economic and financial variables. Next, this latent variable enters a structural Factor-Augmented Vector AutoRegression (FAVAR) model (Bernanke et al., 2005) combined with 452 macro and financial variables for the sample countries. Overall our results indicate that the prolonged uncertainty about a potential Brexit and, in the case of a Leave vote the terms and the outcome of the negotiations with the EU, had a positive effect on the economies of major EU countries like France, Spain and Italy and negative effects for the UK economy. Domestic activity and gross investment seem to be significantly affected while there is a weaker effect on financial variables and economic sentiment. No effect from the Brexit uncertainty was detected for the US economy. Finally, by employing the Diebold and Yilmaz spillover matrix (2009, 2012) we find that the UK is the most important net sender of uncertainty spillovers in the EU, while Germany and France are among the most important net receivers of uncertainty shocks.
Keywords: Brexit, Uncertainty, spillovers, FAVAR, QUALVAR, Macroeconomic impact
JEL Classification: B22, E44, E65, G28
Suggested Citation: Suggested Citation