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Brexit, the City of London, and the prospects for portfolio investment

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This paper examines the international financial consequences of Brexit. It first provides a survey of the still limited literature on EU membership and international capital flows. It then provides new estimates of the impact of Brexit on cross-border investment utilizing data from the IMF’s Consolidated Portfolio Investment Survey. It lastly provides a comparative analysis of these same issues using data on crossborder capital flows from the BIS. The conclusion is that the impact on cross-border capital flows to and from the UK is likely to be substantial.

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  1. IMF (2016) provides a survey of studies of these macroeconomic and growth effects. The majority of these conclude that Brexit would have a negative impact on the British economy, although the IMF mentions three (Mansfield 2014; Booth et al. 2015; Minford 2016) that argue for positive effects.

  2. All this assumes that the past is a good guide to the future, that hysteresis in financial flows is limited (that just as inward FDI rose with British accession it will now fall with Brexit), and that financial and nonfinancial FDI respond similarly (inward FDI in financial services accounting for a large share of all inward FDI for the UK than for the typical EU country). The limited evidence on this last question suggests that financial and nonfinancial FDI do in fact respond similarly (see e.g. Davies and Kileen 2015). These estimates also assume that UK financial institutions do not receive special passporting rights that are financially equivalent to membership in the Single Market and that the UK does not reach a customs union agreement with the UK, outcomes that would presumably reduce the negative impact of Brexit on capital mobility. Note that Bruno et al. find that membership in the European Free Trade Association and the European Economic Area do not substitute for access to the Single Market in terms of their implications for FDI.

  3. This study encompasses years both before and after the advent of the Single Market, enabling the authors to pursue a quasi-difference-in-differences approach.

  4. They impose this limitation for reasons of data availability.

  5. The authors also find an impact of bilateral trade for the volume of bilateral bank flows, but this effect is relatively small.

  6. Following previous literature, the common language dummy equals one when a language is spoken by at least 9 per cent of the population in both countries.

  7. One can imagine also other channels that might amplify or attenuate the effects of Brexit, such as the induced response of exchange rates and interest rates, for example. (Recall how the Bank of England took down the interest rate and allowed the sterling exchange rate to depreciate following the 2016 referendum.) Modeling these channels would, however, require ancillary assumptions about the impact on the exchange rate and interest rates, assumptions that would inevitably be arbitrary, historical experience providing no guidance here.

  8. In robustness checks we also estimate equations where we drop the entire set of offshore centers identified by the International Monetary Fund.

  9. The one anomaly is the sign of destination-country population.


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University of California, Berkeley; University of Minnesota; and University of Southern California, respectively. Eichengreen thanks the Bank of England, where some of this research was undertaken, for its hospitality.

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Correspondence to Barry Eichengreen.

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See Tables 3, 4, 5, 6 and 7.

Table 3 EU membership, Euro area membership and cross- border portfolio investment stocks, selectivity corrected estimates
Table 4 EU membership, Euro area membership, and investment in equity and investment fund shares, selectivity-corrected estimates
Table 5 EU membership, euro area membership, and Investment in all debt securities, selectivity-corrected estimates
Table 6 EU membership, Euro area membership, and long-term portfolio investment, selectivity-corrected estimates
Table 7 EU membership, Euro area membership, and short-term portfolio investment, selectivity-corrected estimates

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Eichengreen, B., Jungerman, W. & Liu, M. Brexit, the City of London, and the prospects for portfolio investment. Empirica 47, 1–16 (2020).

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