Brexit and Sterling Depreciation: Impact on Selected Economies

Abstract

The Brexit vote in Britain has created great uncertainty in the global economy. In the UK, the immediate fallout included a severe depreciation of the pound sterling, declines on the stock market and a freeze in investment. All these shocks were transmitted to other economies, affecting their competitiveness. This study analyses the impact of sterling depreciation on economic growth and stock price indices in the UK and selected other economies. Specifically, the author applies a global vector autoregressive model to analyse the whole global economy consisting of many interlinked countries. The study shows that an unexpected drop in the value of the sterling has the potential to reduce economic activity in the UK and a number of other economies. The results validate the view that Brexit will decrease domestic demand in the UK, thus hitting Britain’s trading partners. The analysis also shows that exchange rate shocks in the UK have a significant negative impact on stock market indices worldwide.