IDEAS home Printed from https://ideas.repec.org/a/jfr/ijfr11/v8y2017i4p7-22.html
   My bibliography  Save this article

Brexit¡¯s Protectionist Policy and Implications for the British Pound

Author

Listed:
  • Lara Joy Dixon
  • Hoje Jo

Abstract

In this paper, we examine the association among the macroeconomic variables - interest rate, inflation rate, unemployment, and the expected spot rate of the British pound with respect to the Euro around the announcement of ¡°Brexit¡±, June 2016, using the two international parity relationships, Purchase Power Parity (PPP) and International Fisher effect (IFE). We use the two international parity relationships to examine the significance of change in daily interest rates and monthly inflation rates on the change in actual daily spot rates. In addition, we postulate that the protectionist nature of Brexit policy has contributed to lowering U.K. unemployment and prompted wage growth, resulting in higher inflation rates. Our analysis, examining both the magnitude and directional deviation of the actual spot rate compared to the spot rate using the two parity relations, indicate that spot rates predicted based on the PPP and the IFE relations suggest the weakening of the British pound after the Brexit announcement. Furthermore, we find that U.K. unemployment has reduced due to the expanded monetary policy, consistent with the prediction of the Phillip¡¯s curve.

Suggested Citation

  • Lara Joy Dixon & Hoje Jo, 2017. "Brexit¡¯s Protectionist Policy and Implications for the British Pound," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(4), pages 7-22, October.
    • Handle: RePEc:jfr:ijfr11:v:8:y:2017:i:4:p:7-22
    DOI: 10.5430/ijfr.v8n4p7
    as

    Download full text from publisher

    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/12227/7496
    Download Restriction: no
    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/12227
    Download Restriction: no
    File URL: https://libkey.io/10.5430/ijfr.v8n4p7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Brücker, Herbert & Hauptmann, Andreas & Jahn, Elke J. & Upward, Richard, 2014. "Migration and imperfect labor markets: Theory and cross-country evidence from Denmark, Germany and the UK," European Economic Review, Elsevier, vol. 66(C), pages 205-225.
    2. Frenkel, Jacob A, 1981. "Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 665-705, August.
    3. William Gruben & Darryl Mcleod, 2004. "The openness-inflation puzzle revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 11(8), pages 465-468.
    4. Yu-chin Chen & Kwok Ping Tsang, 2013. "What Does the Yield Curve Tell Us about Exchange Rate Predictability?," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 185-205, March.
    5. David Romer, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 869-903.
    6. Abuaf, Niso & Jorion, Philippe, 1990. "Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    7. Adler, Michael & Lehmann, Bruce, 1983. "Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-1487, December.
    8. Ian H Giddy & Gunter Dufey, 1975. "The Random Behavior of the Flexible Exchange Rates: Implications for Forecasting," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 6(1), pages 1-32, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goldberg, Lawrence G. & Gosnell, Thomas F. & Okunev, John, 1997. "Purchasing power parity: Modeling and testing mean reversion," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 949-966, July.
    2. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    3. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
    4. repec:ebl:ecbull:v:6:y:2003:i:2:p:1-11 is not listed on IDEAS
    5. Philip Shively, 2003. "Threshold stationary real exchange rates: a nonlinear, multivariate approach," Economics Bulletin, AccessEcon, vol. 6(2), pages 1-11.
    6. Pan, Ming-Shiun & Liu, Y. Angela & Chan, Kam C., 1996. "An examination of long-term dependence in black market exchange rates in eight Pacific-Basin countries," International Review of Economics & Finance, Elsevier, vol. 5(2), pages 175-185.
    7. Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
    8. Matteo Pelagatti & Emilio Colombo, 2012. "Unpuzzling the Purchasing Power Parity Puzzle," Working Papers 221, University of Milano-Bicocca, Department of Economics, revised Mar 2012.
    9. Richard C. Marston, 1990. "Systematic Movements in Real Exchange Rates in the G-5: Evidence on theIntegration of Internal and External Markets," NBER Working Papers 3332, National Bureau of Economic Research, Inc.
    10. Jón Steinsson, 2008. "The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models," American Economic Review, American Economic Association, vol. 98(1), pages 519-533, March.
    11. Mihir A. Desai & James R. Hines, Jr., 1999. "Excess Capital Flows and the Burden of Inflation in Open Economies," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 235-272, National Bureau of Economic Research, Inc.
    12. Mostafa SALIMIFAR & Mohammad Javd RAZMI & Zahra TAGHIZADEGAN, 2015. "A survey of the effect of trade openness size on inflation rate in Iran using ARDL," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(604), A), pages 143-154, Autumn.
    13. Rashid Sbia & Helmi Hamdi, 2020. "Remittances and inflation in OPEC countries:Evidence from bias-corrected least-squares dummy variable (CLSDV) estimator," Economics Bulletin, AccessEcon, vol. 40(3), pages 2471-2483.
    14. Taylor Mark P. & Sarno Lucio, 2001. "Real Exchange Rate Dynamics in Transition Economies: A Nonlinear Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-26, October.
    15. Meese, Richard & Rogoff, Kenneth, 1986. "Was it real? The exchange rate -- Interest differential relation: 1973-1984," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 297-298, June.
    16. Simon, David P., 1996. "An empirical reconciliation of the Miller model and the generalized capital structure models," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 41-56, January.
    17. Catherine S. F. Ho & M. Ariff, 2009. "A Test of Purchasing Power Parity: Asia Pacific and Latin America," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 5(2), pages 33-53.
    18. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    19. Si Mohammed, Kamel & Chérif touil, Noreddine & Maliki, Samir, 2015. "An Empirical Test of Purchasing Power Parity of the Algerian Exchange Rate: Evidence from Panel Dynamic," MPRA Paper 75285, University Library of Munich, Germany.
    20. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-1271, December.
    21. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jfr:ijfr11:v:8:y:2017:i:4:p:7-22. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gina Perry (email available below). General contact details of provider: http://ijfr.sciedupress.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.