Commentary: The Referendum Blues: shocking the system

Pub. Date
03 August, 2016

When faced with a complex systems of inter-related equations, economists are used to undertaking perturbation analysis in order to understand key relationships, in which we shock the economic system and trace out the effects on certain variables. We may be interested in whether the system is stable, in plotting its return to equilibrium, or in the dynamics of how variables respond or jump from one resting point to some other. The decision first to hold a Referendum and then the decision to Leave the European Union have certainly shocked our economic and political settlement. The question is whether the Referendum shock has simply revealed something about the system or may go further and act to undermine its fundamentals. In the Economic Prospects section of this Review we present the National Institute’s estimates of the consequences of the Referendum, and as indicated in our May Review,1 we continue to expect a slowdown in overall economic activity following the Leave vote and a period of heightened uncertainty that will act to bear down further on activity in the UK and, to a lesser extent, abroad.

1 See Armstrong and Portes (2016) for their commentary here