Brexit is noise in the bigger picture of monetary strangulation

A James Alexander/Marcus Nunes post

Independent of Brexit, the bigger issue remains that all three currency blocs – USD, Euro and British Pound – are seeing low NGDP growth, too low for comfort. Small real shocks like Brexit (let´s call them, à la Robert Higgs, actual and/or potential institutional discontinuities) cause market mayhem precisely because NGDP growth is too low and thus rather fragile and easily knocked lower.

Why is NGDP level and growth so low? Because central banks seem to like it that way. Their 2% inflation targets dominate their discourse and all their internal projections show them on course to meet their targets in two years’ time – and to hell with NGDP growth. The result is slow monetary strangulation; Brexit is mere noise in this bigger picture.

Nevertheless, given the nature of Brexit, that mixes Supply and Demand shocks, some clarification is in order.

  1. Brexit caused a (global) fall in velocity (AD shock). This requires an offsetting rise in money supply
  2. Brexit caused a (less global) fall in trend real growth (AS shock). Given that monetary policy is synonimous with interest rate policy, this requires a fall in interest rate (because the neutral rate has fallen), which at the ZLB is not forthcoming. In that case, a negative AS shock automatically turns into a negative AD shock.

Solution: Forget interest rate targeting and concentrate on nominal stability (NGDP-LT)


If the negative AS shock is permanent, for nominal stability to be maintained you require a lower trend growth in NGDP.


Permanent AS shocks tend to be rare!

4 thoughts on “Brexit is noise in the bigger picture of monetary strangulation

  1. James, what’s your view on UK equities? It still looks pretty horrible for domestic firms but the indices are looking reasonably buoyant.

    I can’t access ONS data as well since they “improved” the site layout, but Q1 NGDP looks strongish in the QNA data today?

  2. It’s hard to know what UK equities are, exactly. Pure UK companies like retail have been really suffering for a few years due to weak NGDP growth and the switch to Internet shopping. A lot of small UK service companies are really outsourced government departments and suffering due to weak NGDP growth/austerity too. A lot of UK GDP is inside non-UK international firms, autos, utilities, Aldi/Lidl, mobile telecoms, software. Or inside unquoted partnerships: law, accounting, consultancies, architects. Not much of the UK economy is quoted in the UK, or quoted at all. Often, the worst bits are quoted, like banks.

    Just looked at the QNA, or tried to, but they’ve already been withdrawn due to errors. More later, I guess.

  3. OK. I think the QNA say that UK NGDP grew 2.8% YoY in 1Q 2016, up a bit on the prior two quarters. But that is not news, roughly same as in the first two estiamtes. It makes an average of 2.5% over the last four quarters. Are you happy with that? Trend is down. And Carney may be helping out now (see latest post), for how long? Policy is undoubtedly tight. Projected 2% inflation 2 years out is monetary strangulation.

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