Ricardo Reis's picture
Affiliation: 
London School of Economics and Columbia University
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 is great uncertainty on how large the effects will be, but few good arguments and no serious study showing that the effects would be anything but negative.

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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:
Not confident
Comment:
"Significant" is too vague to put a precise probability around. But, implied volatility in sterling/dollar 3-month option contracts is very high (around 14%, which is 1.5 times higher than in January) while the betting markets for Brexit seem to put its odds at around 20%. Combining these two numbers, it seems that the financial markets think the unlikely event of Brexit would lead to significant disruption in the value of sterling.

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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:
Confident
Comment:
The removal of passporting rights would likely mean that a few large banks would move out. Whether others would follow or not depends on the strength of agglomeration effects as opposed to other forces for path dependence in spatial development, so it is hard to assess whether the long-term result would be substantial or not. Still, the only way is down: London is currently the clear large financial center in Europe, and none of the arguments for why leaving the EU would improve its position seem plausibly significant.

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:
Neither agree nor disagreee
Confidence level:
Very confident
Comment:
Helicopter money is a dangerous idea, negative interest rates are a good idea, and abolishing currency is a bad idea. Exploring other tools, like buying different assets under QE, and issuing different types of reserves are good ideas to explore in the future. So, I agree with studying and operationalizing new tools, but disagree with some of the ones in the question.

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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:
Strongly agree
Confidence level:
Very confident
Comment:
The central bank's balance sheet has *always* been a policy tool, especially in open economies where central banks hold foreign reserves. Moreover, even when a central bank chooses interest rates, this is only effective insofar as it is backed by the central bank's ability and willingness to issue reserves, and it partly depends on the assets bought with those reserves. Finally, we know from the monetary transmission mechanism that even setting interest rates affects different financial prices and markets differently, and we rely on this to affect economic activity. The use of QE and other unconventional tools in the recent past has just made us study these issues better, learn more about their effects, and so become more confident about using them in the present and in the future. See http://www.columbia.edu/~rr2572/papers/15-QEfuture.pdf or https://ideas.repec.org/a/aea/jecper/v27y2013i4p17-44.html

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