Brexit Associated Sharp Depreciation and Implications for UK's Inflation and Balance of Payments

This study has analysed the implications of exchange rate depreciation for inflation and the trade balance of the United Kingdom in the context of Brexit. Employing a TVSVAR framework in which the sources of time variation were both the coefficients and variancecovariance matrix of the innovations on the data from Jan 1989 to Sep 2016, we found that the sharp depreciation of Stirling led to significant improvements in the external balance as well as steering inflation towards the target. The empirical evidence does not support the notion that the inflation targeting could lead to diminishing pass-through; in fact, there has been an increase in the responsiveness of inflation and trade balance to real exchange rate shocks. The findings have profound implications for the British economy in the Post-Brexit epoch.