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

Voting history

Monetary policy and the zero lower bound (ZLB)

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Question 1: Do you agree that it is feasible for the UK authorities to change the monetary system so that materially negative policy interest rates could be safely implemented? (In answering, you may wish to explain your reasons and define your view of 'material')

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Answer:
Agree
Confidence level:
Confident
Comment:
The policy rate is that at which the Bank of England interacts with the money market, and at the short end that is the equivalent of the deposit rate on bank assets at the Bank. The UK could more easily than other countries have a negative policy rate, perhaps as low as 1.5 per cent, because of the cost of storing cash when the largest note in circulation is £50 (which could easily be withdrawn). However, that may not be low enough for some purposes, and lower rates would require noticeable changes in the transaction mechanism and in the storage of value. Regular re-issuing of notes with a fee for transferring between issues would perhaps be the simplest way to allow for this to happen. An annual exchange of notes with a fee based on the target negative rates could be implemented. Rates could perhaps be as low as -3.0 per cent on deposits. Coin based storage would be expensive, but possible, and this could be limited by swapping to heavier coins. However, there would be cost, efficiency and distributional consequences of such policies.

The Importance of Elections for UK Economic Activity

Question 2: Do you agree that the outcome of the general election will have non-trivial consequences for aggregate economic activity (employment and GDP)?

Answer:
Agree
Confidence level:
Extremely confident
Comment:
The outcome of the general election will have an effect on GDP. The potential coalitions will have markedly different debt reduction and spending policies. A Labour dominated coalition will have higher spending on infrastructure and slower debt reduction than a Conservative dominated coalition. A Labour dominated coalition is likely to see higher growth and lower unemployment in the first three years of the parliament. A Labour led coalition may see growth ¼ to ½ percent a year higher for three years, closing the output gap more quickly than would otherwise happen.

Question 1: Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?

Answer:
Strongly Disagree
Confidence level:
Extremely confident
Comment:
Austerity policies have reduced GDP below where it would have otherwise have been over the last five years. Fiscal contractions are almost always negative in their impact on GDP in the short to medium term. The short term multiplier from a spending led contraction is unlikely to be much above a half. The impacts of austerity are unlikely to have been large in the last three years. The effects of lower interest and exchange rates will not have offset the initial negative impact of austerity on demand. Deficit reduction is necessary, but the pace could have been slower, and GDP would have been higher, if not by much. There is no risk of default on UK government debt, and a ten per cent variation in the level of debt would leave interest rates unaffected.

Greece’s elections and the future of the Eurozone

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Question 1: Do you agree that a Syriza victory on 25 January would lead to a significant or sustained escalation in spreads for other peripheral Eurozone countries?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Euro Area government bond spreads reflect exit risk and default risk. It should be possible for the ECB to offer a derivative contract to government bond holders that covers the exit risk but leaves them with the default risk. If it is clear that the ECB will offer this contract to government bond holders, then spreads should not increase in the rest of the Euro Area. A contract of this nature does not involve a bailout, and should be acceptable to European and German courts. However, a Greek default whilst remaining in the Euro Area might increase the perceived probability of defaults elsewhere, and spreads might then rise.

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Question 2: Do you agree that refusal of the core EU countries to a renegotiation of the Greek bailout agreements would carry serious risks for the economic well-being of the Eurozone?

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Answer:
Disagree
Confidence level:
Not confident
Comment:
It should be possible to isolate the Greek problem, and the ECB should be able to take precautions to cover exit risk for other government bond holders. Greek exit from the Euro Area may strengthen the Area as it would become clear that the fiscal rules are binding. Conceding to the Greeks over debt forgiveness may encourage other countries to play the same strategy, and this would weaken the Euro Area.However, it would be better for the Greeks if they stayed in, and some concessions (short of debt restructuring) should be considered. It may be possible to slow the austerity programme noticeably in response to clear and binding commitments to move the Greek economy toward a more competitive market based model. There are also asset sale options and wealth tax possibilities that can be explored to reduce the debt burden.

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