The kindness of strangers : Brexit and bilateral financial linkages

Author / Creator

Fischer, Andreas M., author

Available as

Online

Summary

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 examin...

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 firm response to the Brexit vote suggests that understanding aggregate capital waves is more complicated at the firm level.

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