How the inflation targeting system can deal with the economic effects of Brexit

Abstract

On 23 June 2016, the citizens of the United Kingdom (UK) took part in one of the most iconic votes in modern economic history as they voted in favour of the UK leaving the European Union (EU). This has resulted in great uncertainty around the future of the economy of the UK as well as the world economy. There were obvious and immediate effects around the time of the vote, such as the decrease in business and consumer confidence, depreciation in the value of the pound which will ultimately lead to inflation, and there are also many effects which we will only see come to fruition as the Brexit (Britain exiting from the EU) scenario plays out over the coming two- to three-year horizon. This allows us to conduct a scenario analysis of the various methods that the UK may utilise to withdraw from the EU and the effects that these methods will have on the economy of the UK and these effects will come through many channels. Our analysis shows how the Bank of England can use monetary policy to limit the effects of Brexit through trying to achieve its 2% inflation target.