Ray Barrell's picture
Affiliation: 
Brunel University London
Credentials: 
professor of economics

Voting history

ECB's quantitative easing

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Question 1:

Do you agree that the design of the ECB's QE programme reduces its effectiveness? 

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Answer:
Disagree
Confidence level:
Confident
Comment:
Government deficits are constrained by political costs, and if debt is held abroad the costs of default to domestic residents and politicians are lower. Hence any scheme that increases foreign holdings of government debt raises the risk of default. We have just seen this in the case of Greece, where foreign holding dominated the debt stock. A QE programme without a risk sharing agreement that left default liability with the issuing country could be seen as more likely to be gamed by some players and hence could involve higher borrowing costs for everybody. I would judge that the positive effect of constraining excess debt issuing would outweigh the negative (single country) effects of any asymmetries in existing risks. A clear allocation of the default risks reduces default probabilities and hence borrowing costs on average.

Deal or no deal: The Greece standoff

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Question 3: Do you agree that implementation of the agreement will lead to an expected decrease in Greek debt repayments?

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Answer:
Strongly Agree
Confidence level:
Very confident
Comment:
Debt repayments will fall. The agreement will almost certainly lengthen the period of debt to maturity, reducing repayments. There may also be some debt forgiveness. However, the larger the default component, the more costly will borrowing be for the Greeks in future.

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Question 2: Do you agree that Greece would be better off defaulting right now rather than signing to the agreement under consideration?

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Answer:
Disagree
Confidence level:
Very confident
Comment:
Immediate default would be costly in the short to medium term. Unilateral action would not build goodwill in the political and financial communities. Default would probably mean exit from the Euro accompanied by a noticeable devaluation. The gains from devaluation are normally overstated, and they are often small and transitory. The damage to tourism from exiting the currency could be large, offsetting other gains. Outright default on this scale would probably exclude Greece from international capital markets for some years. Government deficits in the future would have to be covered by domestic residents, and new government debt would have to be held domestically. The situation might be distinctly uncomfortable, and protecting an actuarially unsound pension system that has been sustained by foreign borrowing would no longer be possible.

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Question 1:  

Do you agree that, on balance, the implementation of the agreement as outlined in media reports will have a non-trivial negative effect on Greek GDP?

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Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
The negative effects of the package are likely to be small. The deal appears to involve a tightening of fiscal policy of perhaps 1.5 per cent of GDP as compared to forecast, but a loosening as compared to previous plans. If everybody in Greece expected the forecast outturn then the current plan will be marginally contractionary by perhaps 0.5 this year as compared to what otherwise would have happened. Most of the changes are in indirect taxes and benefits, and multipliers for these are lower than for spending. The multiplier effect from the 'efficiency saving' component is likely to be zero. However, a deal my change prospects for Greece and for its tourist industry and it may overall be positive.

Monetary policy and the zero lower bound (ZLB)

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Question 2: Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

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Answer:
Strongly Disagree
Confidence level:
Very confident
Comment:
The need for negative policy rates may be temporary, and hence the benefits may be transitory. The costs of changing the financial system may be noticeable and they are possibly permanent. It is probably best to discuss change, but not implement it. The potential real policy rate depends on a number of factors. It is the rate on an essentially risk free, liquid asset. The policy rate may need to be lowered when the authorities wish to stimulate demand by reducing borrowing rates from banks and others for individuals and firms. There may be other ways for the Bank of England to reduce borrowing rates. There are a number of reasons why risk free rates may currently be temporarily low. When banks (or regulators) increase core capital requirements the wedge between borrowing and deposit rates rises, with higher borrowing rates and lower risk free rates. When market participants perceive a high risk of bank failure, the risk free rate will fall as portfolios change. Bank capital is rising, and perceptions of banking sector risk remain high in Europe. It would be better to deal with these issues, raising risk free rates whilst reducing borrowing rates, before restructuring the financial system. There are also other policy tools available when a recession occurs. More active bank restructuring could help reduce perceived risks of failure, raising risk free rates and reducing borrowing rates. In a recession bank capital requirements could be reduced, with borrowing rates falling. In addition, the Bank could intervene directly in private sector bond and equity markets with special vehicles, reducing borrowing costs to firms in doing so. These are much less costly than cash taxes. There are much better tools available in a recession. Fiscal policy remains available in the UK, and it would be wise to use it if a recession occurred. Taxes could be cut, or spending increased on a temporary basis.

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