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International Economics and Economic Policy

, Volume 16, Issue 1, pp 215–265 | Cite as

BREXIT perspectives: financial market dynamics, welfare aspects and problems from slower growth

  • Paul J. J. WelfensEmail author
  • Tian Xiong
Original Paper

Abstract

In this analysis, BREXIT is considered with regard to the main consequences for financial markets; and real economic implications are taken into account while policy options are also highlighted. The role of the interest elasticity of the demand for money is emphasized for both welfare analysis of BREXIT and overshooting – assuming that that elasticity will fall post-BREXIT. Key insights emerge from aspects related to Dornbusch-type exchange rate overshooting problems and insights from the Branson model: This medium-term perspective is used to derive some short-term and long-term BREXIT implications. As regards overall welfare effects, the BREXIT welfare effect related to a lower holding of real money balances – due to a lower gross domestic product post-BREXIT in the long run – is rather high, so that adding this to the HM Treasury finding of a 10% income loss from BREXIT suggests that the long run welfare loss of the UK could be high. Moreover, the quality of financial market integration in the EU countries is highlighted: For the first time, financial services trade restrictiveness indices are empirically analyzed. This leads – on the basis of a restrictiveness index regarding international financial services and additional information about prudential supervision quality – to an assessment of the quality of financial markets. Policy conclusions take into account the new protectionist challenges and use insights from the Welfens enhanced growth model with trade and foreign direct investment.

Notes

Acknowledgements

This paper is part of EIIW research funded by the Deutsche Bundesbank. While the authors gratefully acknowledge funding from the Deutsche Bundesbank within the project “The Influence of Brexit on the EU28: Banking and Capital Market Adjustments as well as Direct Investment Dynamics in the Eurozone and other EU Countries”, opinions expressed within represent those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. We gratefully acknowledge research support by Athur Korus and Oliver Ebbers (EIIW); as well as comments by Volker Clausen, University of Duisburg-Essen, and Andrew Mullineux, University of Birmingham, plus other participants at the EIIW workshop in Frankfurt on October 12, 2018. Editorial assistance by David Hanrahan, Samir Kadiric, and Kennet Stave (EIIW) is also acknowledged. The usual disclaimer applies.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019
corrected publication 2019

Authors and Affiliations

  1. 1.European Institute for International Economic Relations (EIIW)University of WuppertalWuppertalGermany
  2. 2.Schumpeter School of Businesss and EconomicsUniversity of WuppertalWuppertalGermany
  3. 3.AICGS/Johns Hopkins UniversityWashingtonUSA

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