DYNAMIC EFFECTS OF BREXIT IN THE ECONOMY OF GREAT BRITAIN
Abstract
In this article, the impact of the withdrawal of the United Kingdom (UK) from the European Union (EU) (Brexit) on the macroeconomic effects on several domestic indicators by important explanatory variables, such as gross domestic product (GDP) of the Eurozone and USA, real exchange rate (RER) and the Bank of England reference rate, is studied with the use of time-varying parameters (TVP) estimates. For this purpose, the Kalman filter with recursive coefficients is employed for the sample of quarterly data ranging from 1995Q1 to 2025Q4. Our findings suggest that the Brexit is associated with strengthening of a positive relationship between dynamics of UK’s output, exports and imports and economic growth in the Eurozone. At the same time, neutrality of consumer prices in respect to GDP of Eurozone has changed to the negative effect since 2020, when the Brexit decision came into force. On the other hand, a positive impact of output growth in the Eurozone on the UK real estate prices has disappeared over the 2020–2024 period. In contrast to the transformation of Eurozone effects since 2020, the Brexit has not affected the impact of US output on the UK macroeconomic developments, including exports and imports. As it is indicated by a dummy for Brexit, its direct impact was manifested in the deterioration of GDP, export and import dynamics, as well as in the decline in real estate prices and the acceleration of consumer price inflation. The restrictive effect in the real sector can be explained by both a decrease in exports and restrictions on imports of intermediate goods. Also, acceleration of inflation could have its own impact, in particular due to an increase in the cost of food imports from EU countries. The resulting decline in real estate prices seems to a predictable effect of the relocation of financial and other companies, with the emigration of a significant number of high-paid professionals. Such an outcome does not contradict the assumption of a negative welfare effect, as the purchasing power of households declined not only by the devaluation of the pound sterling, but by the acceleration of inflation as well.
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