Sir Charles Bean's picture
Affiliation: 
London School of Economics
Credentials: 
MA Cambridge
PhD MIT

Voting history

Brexit: the potential of a financial catastrophe and long-term consequences for the UK financial sector

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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:
nontrivial but ≤ 10%
Confidence level:
Not confident
Comment:
While a period of asset price volatility is very likely after a vote for Brexit, including a further substantial fall in sterling, I do not expect to see a major cut-off in funding to UK financial institutions. Banks and other financial institutions already cope with the risk of substantial movements in exchange rates, so I do not expect disruption on that score. Also a vote to leave should not be associated with a sharp deterioration in the quality of banks' assets. That said, it is clearly prudent for the Bank of England to stand ready to provide additional liquidity support should it be needed.

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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:
A vote to leave the EU is almost certain to lead to the migration of some EU-focussed activities, such as euro-denominated clearing. However, London will still retain the attractions of deep markets and a skilled workforce, so I expect the damage to remain relatively limited.

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:
Disagree
Confidence level:
Confident
Comment:
'Helicopter' money is effectively a combination of a debt-financed income tax cut coupled with an open market purchase of the resulting bonds by the central bank. I have no problem with further fiscal stimulus, if conditions both warrant and permit, though the effect on demand of a (temporary) income tax cut is likely to be much less than that from, say, an increase in investment in infrastructure. Advocates of helicopter money will argue that a key point is that the monetary injection is permanent. However, they never say how this is to be made credible, as the central bank can always withdraw the injected reserves in the future - in effect there is a monetary 'vacuum cleaner' as well as a helicopter! So what determines whether the monetary injection is permanent or not depends on the policy framework, not any current announcement. Thus the Bank of England's past monetary injection as a result of QE will be permanent if, and only if, it is necessary to meet the inflation target in the future. There is no magic additional instrument waiting to be deployed here. While I agree that ever-larger doses of QE may be of declining effectiveness and carry attendant risks, e.g. to financial stability, I am not persuaded that measures to evade the lower bound on policy rates by taxing cash or eliminating it entirely are a good idea. Although cash is less important than it was, it remains useful for modest transactions and taxing cash or outlawing it would probably be regarded by the public as illiberal and unacceptable.If we have to go in this direction, then I would prefer to raise the target inflation rate, though I am not convinced we are at that point yet either. More generally, I think that trying to find ways to facilitate even lower real interest rates is tackling the symptom, rather the cause, which is a low natural (global) real safe rate of interest brought about by a mix of an high propensity to save that is too high relative to the propensity to invest (at a global level). Too much of the burden is being placed on monetary policy at the current juncture. More attention should instead be placed on fiscal and structural policies that would have the effect of raising the natural real rate of interest,

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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 disagree
Confidence level:
Very confident
Comment:
While large-scale asset purchases (QE) should remain part of the central bank's armoury when policy rates are constrained to the downside, the conventional short-term policy rate should be the preferred monetary policy instrument once the policy rate is clear of its floor (i.e. in 'normal' times). That is because there is less uncertainty around the impact on the economy of variations in the policy rate than there is surrounding the impact of asset purchases. Asset purchases also involve taking on risks to the consolidated public sector balance sheet (especially if the central bank acquires private assets such as mortgage-backed securities, corporate debt or equities) and thus take the central bank into quasi-fiscal territory. So they should only be deployed in extremis.

National Living Wage and the UK economy

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Question 2: Do you agree that the new NLW will have a muted effect on wages and prices?

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Answer:
Agree
Confidence level:
Confident
Comment:
Unlike the ambiguous impact on employment, I think it is rather more likely that there will be an upward impact on wages and prices (assuming that it is not fully offset by MPC), though the effects will probably be pretty modest.

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