Bank Of England Says Do Brexit, Get It Over With

True, this isn’t quite what they come out and say, not exactly, but it’s the implication of their latest research on uncertainty. We need to just do Brexit, get it done and dusted, for the long term good of the economy:

Is uncertainty a significant drag for investment and consumption? Since the global financial crisis heightened uncertainty has been considered to be one of the main factors behind the depth of the great recession and the subdued recovery. Understanding the channels through which uncertainty affects economic activity is therefore of primary interest for policymakers in order to design appropriate policy responses. In our recent working paper, we show that shocks increasing macroeconomic uncertainty can lead to very persistent negative effects on economic activity that last well beyond the business cycle frequency. In a theoretical framework, we argue that the presence of long-term risks about the economic outlook can exacerbate the households’ precautionary savings motive and the overall effects of uncertainty shock.

Sure, bad things can happen to an economy. But being uncertain about that future is one of those bad things that can happen. What’s the greatest uncertainty to the British economy? Whether, when and how Brexit will happen. And the longer this goes on the worse it gets.

This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous-growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.

To pull that out of the jargon, when every bugger’s running around screaming because they don’t know what’s going to happen then things are dark for the long term future of the economy. Just because the screaming and the running around means no bugger is doing anything else.

And here’s the thing – that lookin’ dark bit gets worse the longer the uncertainty lasts. To the point that the effect just of the not knowing becomes greater than the possible effect of any particular event in that universe of possibilities. It really is true that continuing to delay Brexit will, at some point, become worse than any particular Brexit outcome.

Thus get on with it, get it done. And given that we’ll get something of a bloody revolution if the Remainers win – we Brits being really quite keen on this democracy idea, we get to choose not they – then the getting on with it will have to be to leave. Yesterday would have been good, tomorrow if that’s not possible.

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Quentin Vole

I’ve been saying this to anyone who will listen (a select band) for the last couple of years, since it became obvious that the EU had no intention of negotiating seriously. Just leave, keep the £39 billion until the EU can prove to an independent court that we genuinely owe it (I expect we’ll end up paying £10±5 billion a decade or so down the road) and let the chips fall where they may. Significant industries (aerospace, pharma, motor) are big enough to sort themselves out. There’ll be a bit of a hit (<1%) to GDP for a couple of… Read more »