Impacts of Brexit in the UK and the EU: Economic Models and Applications

Economic policies in the United Kingdom (UK) and the European Union (EU) are likely to change after the conclusion of the Brexit negotiation. How will such reforms impact the efficiency and growth of the economy, allocation of resources across major production sectors, and redistribution of welfare of households in these economies is an interesting issue.

We base analysis on popular macro models: strategic interaction model, the two country global economy under model, or the Ricardian trade model based on the comparative advantage of these two economies. A dynamic computable general equilibrium (CGE) model of UK and EU economies, based on the heterogeneity of households and firms as revealed in the latest input-output tables of these economies from the Organism for Economic Co-Operation and Development and the Dynamic Stochastic General Equilibrium model on time series or panel data from the Eurostat and the Office for National Statistics are employed to measure these quantitative impacts. The dynamic general equilibrium model builds on the micro-consistent data set from the input-output tables of these countries. Computation of the dynamic general equilibrium models of Germany, France, the UK, and Spain supports the basic results that Brexit effects can be negative or positive depending on how skill-biased technical progress in the UK compares to the rest of the EU and how the trade arrangements occur after Brexit. There is significant uncertainty about the processes and outcome of Brexit negotiations. While efficiency in allocation of resources can improve the UK economy by reducing the cost of production and making the UK more competitive in the global economy. When the UK may trade in better terms with the emerging markets and developing economies, these gains may
be eroded if the EU retaliates to the UK. Thus the future of the UK is hanging on a balance.