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Brexit, Borders, and the Bank of England (Wonkish)

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A few days ago the Bank of England released a report on the possible macroeconomic impact of Brexit. The most pessimistic scenarios were eye-poppingly bad – see Figure 1 — showing a worse slump than the one that followed the 2008 financial crisis. Not surprisingly, Brexit opponents seized on the report, while supporters accused the BoE of engaging in scare tactics.

I personally think Brexit is a mistake, but was puzzled by how big some of the numbers were; I tweeted about that, and the BoE reached out to me to offer some explanation of what was going on in their analysis. What I want to do here is, first, to recount my understanding of their logic; then offer my own views on what a reasonable Brexit projection might assume for both the short and the long run.

1. Brexit according to the BoE

First things first: the people I spoke to at the BoE were adamant that they were not trying to scare people, push them into accepting Theresa May’s deal, or anything like that. By their account, this report was about financial stability, assessing the robustness of the banks in the face of possible shocks. The very negative scenarios that caught everyone’s attention weren’t projections, but rather an attempt to game out the consequences if the worst happened.

But where did these negative scenarios come from?

When economists try to assess changes in trade policy, they normally use some kind of “computable general equilibrium” (CGE) model. These models attempt to take account of the impacts of trade policy on consumption, production, and the allocation of resources. And there has been quite a lot of CGE modeling of........

© The New York Times