To Leave or Remain? Assessing a Bi-Modal Future

Abstract:

In May, the NiGEM team produced counterfactual paths for the UK economy under a variety of scenarios for the UK leaving or remaining in the EU. The negative impact on the economy from leaving, relative to a remain scenario, is reasonably clear but we can also use the model to draw the likely probably densities functions for output in the short run. We explain how this exercise is undertaken and suggest one of two routes: using the data from (i) normal or (ii) abnormal times. One application of this analysis is to assess the increased probability of recession from a decision to leave the EU. We estimate that the probability of a full year's decline in GDP two years out rises from just under 5% to nearly 25% should the UK decide to leave the EU.

NiGEM Observations is a series of occasional notes published by the NiGEM team on topical macroeconomic modelling issues for NIESR corporate sponsors and NiGEM subscribers.