Ethan Ilzetzki's picture
Affiliation: 
London School of Economics

Voting history

Brexit: the potential of a financial catastrophe and long-term consequences for the UK financial sector

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Question 3: What do you think will be the overall economic consequences of Brexit for the UK?

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Answer:
Mildly negative
Confidence level:
Extremely confident
Comment:
The consequences will be only mildly negative because I forsee post Brexit arrangements as being a alightly worse version of the status quo. The UK will not forgo the benefits of free trade with the EU and will negotitate a trade agreement with the EU. The EU will insist on terms comprable to Switzerland or Norway, so that the UK would be required to join Shengen to retain reasonable access to the EU. I forsee the ultimate outcome as the UK having slighlty less free trade, slightly freer migration with the EU, and only slighlty lower de facto exposure to EU regulation. However the UK would have substantially less influence in Brussels. This is not the end of the world, but there is no dimension along which even the greatest proponents of Brexit should wish for such an outcome.

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Question 2: What is the probability that the UK experiences such a significant disruption to financial markets and asset prices following a vote for Brexit on 23 June?

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Answer:
11-30%
Confidence level:
Confident
Comment:
Financial markets are nearly impossible to predict, but one should certainly price in some non-negligible probablility that the uncertainty surrounding Brexit will generate a panic. The ambiguity of the Brexit campaign's plans for the post Brexit world certainly adds to the likelyhood of a prolonged slum as investors "wait and see" what the implications of Brexit are.

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Question 1: Do you agree that there would be substantial negative long-term consequences for the UK financial sector if the UK were to leave the EU?

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Answer:
Neither agree nor disagree
Confidence level:
Not confident
Comment:
I think the overall net impact would be negative, but I dont' think the damage would be "substantial". London is a global, not only a European, central of finance and neither Frankfurt nor Milan could usurp its role due to Brexit. On the margin, though, many banks are already considering moving parts of their operations to Ireland and elsewhere in the EU, and Brexit may certainly accelerate this process.

The future role of (un)conventional unconventional monetary policy

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Question 2:  Do you agree that central banks should operationalise the use of these alternative tools of unconventional monetary policy for use either in the near term, or in the future, as economic conditions warrant?

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Answer:
Disagree
Confidence level:
Very confident
Comment:
I support the use of fiscal policy as a countercyclical tool, but do believe this should remain within the remit of the Treasury. Helicopter money may be a way to exploit the Bank of England's independence to circumvent the political process, but I think this would be unwise. I have no opposition in principle to bringing interest rates below zero, but there is surely a limit to how negative rates can go, so this is a patch at best. I would much rather see countercyclical policy being used more actively in future recessions, or for the Bank of Engalnd's inflation target to be increased, than the tools suggested here.

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Question 1: Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of monetary policy under normal economic conditions?

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Answer:
Disagree
Confidence level:
Very confident
Comment:
I would respond with the question "to what end?". I believe that unconventional monetary policy has the ability to affect asset prices and the slope of the yield curve. Continuing to use these tools when the central bank has its traditional tool--the short term rate--at its disposal means that the central bank would then have multiple policy instruments. Given that the Bank of England has a sole policy objective--an inflation target--it's not clear why it needs more than one instrument and this seems like unnecessary intervention in the workings of financial markets. To be persuaded that these tools should still be active in normal times, I'd want to understand why their proponents believe that they will increase the ability of the central bank to stabilise prices. Alternatively, I'd like to understand what secondary objectives these additional instruments would be targeting.

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