Estimating Macroeconomic Effects of Brexit Using Gravity and State Space Models (2018)

This dissertation aims at estimating the macroeconomic effects of Brexit using the gravity and state space model. Macroeconomics is a branch of economics that deals with the economy as a whole. The gravity model of trade is a model that is used to predict trade flows between two countries. The estimate therefore focuses on how the trade flows between the EU and the UK will be affected by the exit, and in effect how this will impact the economy as a whole. For this study, the macroeconomic indicators of trade, migration, and FDI have been considered.

These variables have been fed into a gravity model for analysis on the possible effects if UK exit is applied. These variables are complex, given that they have been analyzed over long periods of time, with many countries used as parts of the equation. The findings of the research show that the UK economy will experience a negative downturn. Furthermore, places like the city of London will also experience a negative impact of the exit. Job losses, as well as loss of GDP will also characterize the exit. A state space model with GDP, employment, and total factor productivity, trade and intervention variables is used as well. The conclusion made is that the estimates are speculative.

The estimates serve the purpose of providing a guide on the possible highs and lows of the exit, possible numerical reduction on the GDP, as well as the drop on trade, migration and FDI. The recommendations given are for future studies to consider gravity models of other countries that have had similar exits to the UK, as well as the effects of the exit long after the deals had been settled. Because many of the effects of the exit are still unknown, this research highlights the effects only at a speculative degree.

Opinions from David Blanchflower, a professor of economics and Andrew Sentence, an economic advisor have also been included. This research has been limited in the certainty of the exit, and in the use of gravity model that evaluates the macroeconomic effects of the exit based on GDP and distance. Further the State Space model shows that Brexit will have negative macroeconomic effects, a slowdown in economic activity, employment and trade.

The purpose of this dissertation is to highlight the possible consequences of exiting the EU, as well as show the estimated losses the UK may incur due to the exit. Some of the questions that come to mind when doing this research were:

  • Why did the UK join the EU?
  • Why did the UK then decide to leave the EU?
  • Were the French right in denying the UK membership into the EU?
  • What are the impacts that this exit would have on the stability of the EU?
  • 20,000 words – 70 pages in length
  • Excellent use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for economics students

1 – Introduction
Theoretical Basis of the Study

2 – Literature Review
History of the EU
UK Entry into the EU
The Major Issues between the UK and EU
Gravity Model in Answering Economic Impact of Brexit
Trade Relations between the UK and the EU
UK Contribution to the EU
Brexit Immediate Impact on the UK Economy
Effect on Businesses and Household Expenditures
Effect on Financial Markets
Effects on Investments and Employment
Longer Term Effects on the UK Economy
Current Trade between UK and the EU
Exit Scenarios
Effects on trade and Foreign Direct Investment (FDI)
Cautiousness of Treasury’s Estimates
Calculating Loss of Trade and FDI: Trade and FDI Impacts on Productivity
Other Drawbacks of the Treasury Report
Other Criticisms of the Treasury Gravity Model
Brexit Effects on London
London’s Financial Landscape
Banking Services in London
Insurance and Reinsurance
Asset Management
Transaction Clearing
Other Effects
Effects on Germany and Europe
Immigration and Brexit
Possible Frameworks for Customs Union and Internal Market Access
UK Trade Framework as Depicted by WTO, CETA, and DCFTA
Free Trade Rules
Harmonization of the Internal Market
Legal Effect
Dispute Settlement
Effects of Tariff Barriers
Customs Border
Trade Defense
External Trade Policies
Estimation of Implication for Member States
Current State of Brexit Negotiations
State Space Model Estimation of Macroeconomic Effects of Brexit
Bank of England’s Collection of Historic Macroeconomic and Financial Statistics

3 – Method

4 – Discussion
Recommendation for Future Research


Estimating Macroeconomic Effects of Brexit Dissertation
Estimating Macroeconomic Effects of Brexit Dissertation

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