Modelling the long-run economic impact of leaving the European Union

Publication date: 20 Jun 2016 | Publication type: NIESR Discussion Paper | Theme: Macroeconomics, Exiting the EU & Britain after Brexit | NIESR Author(s): Ebell, M; Warren, J; Hurst, I | NIESR Discussion Paper Number: 462

We model the long-term implications of leaving the EU for the UK economy using NiGEM, the National Institute’s large scale structural global econometric model. We examine a scenario in which the UK has no free trade agreement with the EU, focusing on four key shocks: a permanent reduction in the size of the UK's export market share in EU member countries, an increase in tariffs, a permanent reduction in inward FDI flows and the repatriation of the UK’s projected net contributions to the EU budget. We calibrate the size of the shocks on a synthesis of the academic evidence. We explain how each of these four shocks is implemented in NiGEM, as well as examining the key mechanisms by which they are propagated through the model. The export market share channel is the main mechanism by which leaving the EU leads to declines in GDP and consumption relative to the long-run baseline, accounting for a long-run decline in GDP of 2.1% relative to the baseline value, out of a total projected reduction in GDP relative to the baseline of 2.7%.