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Welfens, P.J.J./Xiong, T.: BREXIT Perspectives: Financial Market Dynamics, Welfare Aspects and Problems from Slower Growth

Welfens, P.J.J./Xiong, T.: BREXIT Perspectives: Financial Market Dynamics, Welfare Aspects and Problems from Slower Growth

 

JEL Classification: D6, D53, E6, E66, F5, F21
Key Words: BREXIT, financial markets, macroeconomic policy, political economy, welfare analysis, capital flows

 

Summary

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.

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