No. 1163 - What will Brexit mean for the British and euro-area economies? A model-based assessment of trade regimes

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by Massimiliano Pisani and Filippo Vergara Caffarelli January 2018

This paper evaluates the macroeconomic effects on the UK and the euro area of an increase in trade tariffs associated with Brexit, by simulating a dynamic general equilibrium model of the UK, the euro area, and the rest of the world (RW). Our results are as follows: first, the imposition of tariffs reduces UK exports and economic activity by a non-negligible amount; second, the macroeconomic costs for the UK are reduced if it decides unilaterally not to increase tariffs on imports from the euro area and to reduce those on imports from the RW; third, the macroeconomic costs are particularly high if the lower UK trade openness resulting from the imposition of tariffs reduces the UK's total factor productivity; and fourth, Brexit has negative, but quite limited, effects on euro-area economic activity.