BREXIT perspectives: financial market dynamics, welfare aspects and problems from slower growth

  • Paul J. J. WelfensEmail author
  • Tian Xiong
Original Paper


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 GDP 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 EU28 is highlighted: For the first time, financial services restrictiveness indices are empirically analyzed. This leads – on the basis of a restrictiveness index regarding international commercial banking 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 FDI.



This paper is part of EIIW research funded by the Deutsche Bundesbank. While the authors gratefully acknowledge funding from the Deutsche Bundesbank within the project “The Influence of Brexit on the EU28: Banking and Capital Market Adjustments as well as Direct Investment Dynamics in the Eurozone and other EU Countries”, opinions expressed within represent those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. We gratefully acknowledge research support by Athur Korus and Oliver Ebbers (EIIW); as well as comments by Volker Clausen, University of Duisburg-Essen, and Andrew Mullineux, University of Birmingham, plus other participants at the EIIW workshop in Frankfurt on October 12, 2018. Editorial assistance by David Hanrahan, Samir Kadiric, and Kennet Stave (EIIW) is also acknowledged. The usual disclaimer applies.


  1. Artus P, Virard M-P (2005) Le capitalisme est en train de s’autodétruire (Capitalism is self-destructing). Editions La Découverte, ParisGoogle Scholar
  2. Bank for Internatonal Settlements (2017) 87th Annual Report, April 2016–March 2017, Published 25.06.2017, Basel: BISGoogle Scholar
  3. Bank of England (2018) EU withdrawal scenarios and monetary and financial stability, a response to the house of commons Treasury Committee, 28 November 2018 m
  4. Belke A, Ptok S (2018) British-European trade relations and Brexit: an empirical analysis of the impact of economic and financial uncertainty on exports. International Journal of Financial Studies 6(3):73. CrossRefGoogle Scholar
  5. Born, B., Müller, G., Schularick, M., Sedlacek, P. (2017), The economic consequences of the Brexit Vote, CEPR Discussion Paper No 12454Google Scholar
  6. Branson WH (1977) Asset markets and relative prices in exchange rate determination. Sozialwissenschaftliche Annalen 1:69–89Google Scholar
  7. Dornbusch R (1976) Expectations and exchange rate dynamics. J Polit Econ 84:1161–1176CrossRefGoogle Scholar
  8. Dritsaki, C. (2018), Modeling and forecasting of british pound/us dollar exchange rate: an empirical analysis, in Advances in panel data analysis in applied economic research, Tsounis, N. and Vlachvei, A. (Eds.), Springer Proceedings in Business and Economics, Cham: Springer InternationalGoogle Scholar
  9. Eichengreen B, Mehl A, Chitu L (2015) Stability or upheaval? The currency composition of international reserves in the long run. IMF Economic Review 64:354–380CrossRefGoogle Scholar
  10. Eichengreen B, Mehl A, Chitu L (2017) Mars or mercury? The geopolitics of international currency choice, NBER Working Paper No 24145 (December)Google Scholar
  11. Erken et al (2017) The permanent damage of Brexit, RaboResearch, Rabobank, available at Scholar
  12. European Commission (2018) Commission Staff Working Document, Country Report United Kingdom 2018, SWD (2018) 226, 07.03.2018, Brussels: European CommissionGoogle Scholar
  13. Felbermayr, G., Steininger, M., Yalcin, E. (2017), Economic implications of a protectionist US trade policy,, 22.11.2017, Accessed 05.10.18
  14. Frankel JA (1984) Tests of monetary and portfolio balance models of exchange rate determination. In: Bilson JFO, Marston RC (eds) Exchange rate theory and Practice. University of Chicago Press, ChicagoGoogle Scholar
  15. Froot K, Stein J (1991) Exchange rates and foreign direct investment: an imperfect capital markets approach. Q J Econ 106:1191–1217CrossRefGoogle Scholar
  16. Gaertner M (2001) Macroeconomics under flexible exchange rates. University of Michigan Press, Ann ArborGoogle Scholar
  17. Giegold S (2018) May announces lowest corporate taxes in G20: Tax policy must now be at the heart of Brexit negotiations, comment Sven Giegold MEP available at Accessed 05.10.2018
  18. HM Government (2018) PM speech at the Bloomberg Global Business Forum: 26 September 2018, official transcript, available at Accessed 05.10.2018
  19. HM Treasury (2016) HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, London, April 2016 Available at:
  20. IFF/Zew (2012) Studie zu Dispozinsen/Ratenkrediten für das Bundesministerium für Ernährung, Landwirtschaft und Verbraucherschutz, [a study on interest rates on overdrafts and installment loans for the German Federal Ministry for Food, agriculture and consumer protection], Institute for Financial Services (iff) and Centre for European Economic Research (ZEW), 18 July 2018
  21. IMF (2016), United Kingdom financial sector assessment program, financial system stability assessment, IMF country report no. 16/167, June 2016, Washington DC: International Monetary FundGoogle Scholar
  22. IMF (2018a), Less even expansion, rising trade tensions, world economic outlook update, July 2018, Washington DC: International Monetary FundGoogle Scholar
  23. IMF (2018b), Euro area policies, financial system stability assessment, IMF country report no. 18/226, July 2018, Washington DC: International Monetary FundGoogle Scholar
  24. Jungmittag A (2004) Innovations, technological specialisation and economic growth in the EU. IEEP 1(2):247–273CrossRefGoogle Scholar
  25. Kadiric, S., Korus, A. (2019), The Effects of Brexit on Corporate Yield Spreads: Evidence from UK and Eurozone Corporate Bond Markets. International Economics and Economic Policy, forthcomingGoogle Scholar
  26. Kim SH, Shikher S (2017) Can protectionism improve trade balance?, working paper 2017-10-B, U.S. Washington DC: International Trade Commission
  27. Korus A, Celebi K (2019) The Impact of Brexit News on British Exchange Rates. International Economics and Economic Policy, forthcomingGoogle Scholar
  28. Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71:1695–1725CrossRefGoogle Scholar
  29. OECD (2018) FDI in Figures, April 2018, Paris: OECD Publishing
  30. Park, H. M. (2011). Practical guides to panel data modelling: a step–by–step analysis using stata. Public Management and Policy Analysis Program, Graduate School of International Relations, International University of JapanGoogle Scholar
  31. Singham, S., Tylecote, R. (2018), Plan A+: Creating a prosperous post-Brexit U.K., Institute of Economic Affairs: London
  32. Siourounis G (2003) Capital Flows and Exchange Rates: An Empirical Analysis, Working Paper (08.11.2003), London Business SchoolGoogle Scholar
  33. Tavlas G (1990), On the international use of currencies: the case of the deutsche mark, IMF Working Paper No 90/3Google Scholar
  34. Welfens PJJ (2017a) An Accidental BREXIT. Palgrave Macmillan, LondonCrossRefGoogle Scholar
  35. Welfens PJJ (2017b) The True Cost of BREXIT for the UK: A Research Note, EIIW Discussion Paper No. 234 (updated June 2018)
  36. Welfens PJJ (2018a) New Marshall-Lerner conditions for an economy with outward and two-way foreign direct investment. EIIW Discussion Paper No 248
  37. Welfens PJJ (2018b) Explaining Trumpism as a Structural US Problem: New Insights and Transatlantic Plus Global Economic Perspectives, EIIW Discussion Paper No. 253, EIIW at the University of WuppertalGoogle Scholar
  38. Welfens PJJ (2018c) International Risk Management in BREXIT and Policy Options, EIIW Discussion Paper No. 242, EIIW at the University of WuppertalGoogle Scholar
  39. Welfens PJJ (2018d) Import tariffs, foreign direct investment and innovation: a new view on growth and protectionism, forthcoming as EIIW discussion paper, EIIW at the University of WuppertalGoogle Scholar
  40. Welfens PJJ, Baier F (2018) BREXIT and foreign direct investment: key issues and new empirical findings. International Journal of Financial Studies 6(2):46. CrossRefGoogle Scholar
  41. Welfens, PJJ, Hanrahan D (2018), BREXIT: key analytical issues and insights from revised economic forecasts, EIIW discussion paper no. 235, EIIW at the University of WuppertalGoogle Scholar
  42. Welfens PJJ, Udalov V (2018) International inequality dynamics: issues and evidence of a redistribution Kuznets curve, EIIW discussion paper no. 250, EIIW at the University of WuppertalGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.University of WuppertalWuppertalGermany
  2. 2.Sciences PoParisFrance
  3. 3.IZABonnGermany
  4. 4.AICGS/Johns Hopkins UniversityWashingtonUSA
  5. 5.EIIW and Schumpeter School of Business and EconomicsUniversity of WuppertalWuppertalGermany

Personalised recommendations