A Breakup Between the UK and the EU: The Impact of the Brexit Referendum on Household Savings Rate in the United Kingdom

Abstract: This paper investigates the causal impact of the Brexit referendum on the household savings rate in the United Kingdom, both in the short and long term, by treating the referendum as a natural experiment. The Synthetic Control Method is used to create a counterfactual that tracks the UK's household savings rate before the referendum. The short-term results suggest that the Brexit referendum had a negative impact on the household savings rate, with a decline of 3 percentage points, which is statistically significant at the 5% level. The long-term effects are examined by including the COVID-19 pandemic and Brexit withdrawal period of 2020 Q1 - 2022 Q3. The results suggest that the negative effect of the Brexit referendum on household savings in the UK persists until the pandemic begins in 2020 Q1, after which there was a sharp increase in the household savings rate. To interpret the findings, the Theory of Precautionary Savings and the Permanent Income Hypothesis are employed. This paper contributes to the literature by investigating the impact of the Brexit referendum on a macroeconomic indicator that has not been studied before, and by providing a long-term perspective that includes the effects of both the COVID-19 pandemic and the Brexit withdrawal.