New dawn fades: trade, labour and the Brexit exchange rate depreciation

Vieira Marques Da Costa, Rui ORCID: 0000-0002-7820-7373, Dhingra, Swati ORCID: 0000-0001-5468-3415 and Machin, Stephen ORCID: 0009-0004-8130-2701 (2024) New dawn fades: trade, labour and the Brexit exchange rate depreciation. Journal of International Economics, 152. ISSN 0022-1996

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Abstract

This paper studies consequences of the large exchange rate depreciation occurring when the UK electorate unexpectedly voted to leave the European Union. Sterling plummeted, recording the biggest one-day depreciation of any of the world's four major currencies since Bretton Woods. The prospect of Brexit happening generated sizable differences in how much sterling depreciated against different currencies. Coupled with pre-referendum cross-country trade patterns, this generated variations in exchange rates facing businesses in different industries. The paper offers evidence of a cost shock from the prices of intermediate imports rising by more in higher depreciation industries, but with no revenue offset from exports. Workers were impacted by these increased cost pressures, not in terms of job loss but through relative real wage declines in higher depreciation, larger cost shock industries. This resulted in an aggregate fall in real wage growth of 3 to 3.6% cumulatively over the three years after the referendum.

Item Type:	Article
Additional Information:	© 2024 The Author(s)
Divisions:	Economics Centre for Economic Performance
Subjects:	H Social Sciences > HB Economic Theory J Political Science
JEL classification:	J - Labor and Demographic Economics > J4 - Particular Labor Markets > J40 - General J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J68 - Public Policy L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy; Sectoral Planning Methods P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P25 - Urban, Rural, and Regional Economics; Housing; Transportation
Date Deposited:	13 Aug 2024 23:16
Last Modified:	14 Nov 2024 21:12
URI:	http://eprints.lse.ac.uk/id/eprint/124542

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