The Economics of Brexit: Building a Bridge from Data to Policy Analysis

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On 23 June 2016, the UK electorate voted to leave the EU. Brexit is likely to lead to wide ranging changes in UK economic policy, particularly in the areas of trade and migration. Prior to the referendum most economists thought Brexit would cause a reduction in UK living standards, but there was considerable disagreement over how large the Brexit effect would be, how different consumers and sectors would be affected and what policies the UK should adopt to obtain the best Brexit possible. This project will use changes in economic outcomes since the referendum to learn more about how Brexit is likely to affect the UK economy and to evaluate the costs and benefits of the policy choices facing the UK during Brexit negotiations.The key idea behind the research is that decisions made today are, in part, based on expectations about the future. For example, the price at which shares in a company are bought and sold depends upon expectations about the company's future performance. This means that even before the UK leaves the EU, economic decisions will be affected by the expectations of future changes to the UK economy caused by Brexit. Companies that stand to benefit from Brexit will see their share prices increase, while firms that expect to face increased trade barriers following Brexit may reduce investment leading to lower exports. By analysing the impact of the referendum vote on stock market prices and trade flows this project will shed light on both the short-run economic effects of Brexit and how businesses and market participants expect Brexit to affect the UK economy in the longer term. These findings will lead to a better understanding of the economic impact of Brexit than was possible in work undertaken before the referendum.The results from this project will also help citizens and policy makers determine the best choices for the UK to make as it leaves the EU. For example, identifying which firms and sectors are expected to be the winners and losers from Brexit is important both for the formulation of industrial policy and for designing an implementation plan to help the economy smoothly adjust to Brexit. Similarly, knowledge about what type of trade barriers matter most to UK firms and which UK firms are most at risk from increased trade barriers will play a vital role in shaping the UK's priorities in trade negotiations with the EU and non-EU countries. By addressing these questions the project will highlight the importance of economic analysis for evidence based policy making.