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See Paczos (2018) for more discussion on comparing the various approaches to modelling the economic impact of Brexit.
Except for Iceland, Liechtenstein, Norway and Switzerland, as they participate in the EU single market.
We made a very conservative assumption on the potential reduction of FDI in both scenarios for two main reasons. First, the impact on FDI from leaving the EU could be different compared with joining. Second, some of the impact of a reduction in FDI could have been already captured by the estimates from the trade model. For example, if higher trade barriers lead to a reduction in output by foreign companies producing in the UK, then the fall in output should coincide with a recution in FDI inflows to the UK.
To calibrate the growth affect, we assume FDI inflow as share of GDP of 2.4 percent. The proxy for financial market development in Alfaro and others (2004) is the share of private sector credit in GDP. This takes a value of 46 percent of GDP in the UK in their data from Levine and others (2000).
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