Staff Report 542

The Impact of Brexit on Foreign Investment and Production

Ellen R. McGrattan | Consultant
Andrea Waddle

Revised October 26, 2017

Using simulations from a multicountry neoclassical growth model, we analyze several post-Brexit scenarios. First, the United Kingdom unilaterally imposes tighter restrictions on FDI from other EU nations. Second, the European Union retaliates and imposes the same restrictions on UK FDI. Finally, the United Kingdom reduces restrictions on other major foreign investors during the post-Brexit transition. Model predictions depend crucially on the policy response of multinationals’ investment in technology capital, accumulated know-how from investments in R&D, brands, and organizations used simultaneously in their domestic and foreign operations. A final section compares our predictions to those found by gravity analysis.


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