Working Paper: CEPR ID: DP18453
Authors: Andreas M. Fischer; Pınar Yeşin
Abstract: Bank of England governor Mark Carney warned after the 2016 Brexit vote that the UK is reliant on the “kindness of strangers” to fund its increasing current account deficit. In this paper, we examine whether firms in Switzerland attenuated their investments in the UK following the Brexit vote or whether British-controlled firms in Switzerland repatriated their foreign assets to the UK. Three empirical findings in the bilateral context suggest that Carney’s warning was overly cautious. First, Carney focused strictly on the foreign willingness to invest in the UK; however, the alternative channel of repatriating British assets abroad is equally important. Second, capital inflows and outflows are positively correlated not only in the aggregate, but also across a range of subgroupings at the firm level. Third, the nonuniform firmresponse to the Brexit vote suggests that understanding aggregatecapital waves is more complicated at the firm level.
Keywords: Brexit
JEL Codes: F32; F41; G20; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Brexit vote (F69) | capital inflows and outflows (F21) |
| capital inflows (F21) | capital outflows (F32) |
| Brexit vote (F69) | repatriation of foreign assets (F21) |
| British-controlled firms in Switzerland (F23) | increased capital inflows to the UK (F21) |
| Brexit vote (F69) | varying responses among firms (L20) |