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

Voting history

Deal or no deal: The Greece standoff

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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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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.

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