Jagjit Chadha's picture
Affiliation: 
National Institute of Economic and Social Research
Credentials: 
Professor 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:
Very confident
Comment:
There will be some short run negative effects but in the long run the measured risks to trade, FDI and the fiscal position will tend to bear down on income. The final impact will depend on how well we re-orient trade to the rest of the world and how well the financial sector absorbs the shock of Exit.

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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:
31-70%
Confidence level:
Very confident
Comment:
There would be tightening of monetary and financial conditions reflecting an increased riskiness in Sterling-based assets. Policy and the exchange rate will only be able to offset this to a partial degree and so markets will take some calming down – particularly is the vote to leave is unexpected.

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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:
Agree
Confidence level:
Very confident
Comment:
The UK financial sector has benefitted from being part of the EU but simultaneously from the opt-out from EMU. The UK financial sector has benefitted from liquidity operations made by the ECB, from acting as an entrepot for financial services to the rest of Europe and it has been able to play a leading role in developing the new set of financial regulations. All three of these benefits may be lost under Exit.

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:
Agree
Confidence level:
Very confident
Comment:
We seemed to have closed our mind to a number of possibilities that might include changes in the inflation target or changes in the nominal regime itself to, perhaps, nominal income targeting. But if we concentrate on tools, there may be a number to consider from operationalising negative interest rates on reserves, to re-thinking forward guidance, to using interest rate forecasts and even swaps more imaginatively, as well as developing other money market or balance sheet operations.

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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:
Neither agree nor disagree
Confidence level:
Confident
Comment:
Although similar in spirit because they affect market rates and liquidity, QE is different from standard open market operations or from any underfunding of public debt sales because of the longer maturity of bonds bought, the size of the expansion in the balance sheet and the duration of the holdings. It would be rather unusual to run up such large stocks of debt in normal times, whatever normal may be, unless the central bank lost control of its ability to influence the term structure or if changes in the overall demand for liquidity require some form of QE. So my central view is that it depends!

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