To be or not to be in the EU: the international economic effects of Brexit uncertainty

This paper evaluates the impact of Brexit-related uncertainty on the economies of the UK, EU, and the US. We propose a measure of Brexit uncertainty that has not been employed before in the literature. We first construct a binary variable by selecting Brexit-related events. We subsequently employ the Qual VAR model of Dueker [2005. "Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of US Recessions." Journal of Business & Economic Statistics 23: 96-104] to transform this variable to a continuous latent variable that captures uncertainty on important economic and financial variables. Next, this latent variable enters a structural Factor-Augmented Vector AutoRegression model combined with 452 macro and financial variables for the sample countries. Overall, our results indicate that the prolonged period of uncertainty, had a positive effect on the economies of major EU countries and negative effects for the UK economy. Additionally, the UK is the most important net sender of uncertainty spillovers in the EU, while Germany and France are among the most important net receivers of uncertainty shocks.