Currency Depreciation

Question A:

The costs and risks associated with a sharp fall in the value of sterling outweigh any macroeconomic benefits for the UK of export stimulus due to a weaker currency.

Responses weighted by each expert's confidence

Question B:

Concerns about government finances and debt sustainability can undermine the reserve currency status of a major currency.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Agree
7
Bio/Vote History
Sterling depreciation raises inflation which requires monetary tightening. Interest rates are already rising and now must rise more sharply, with destabilizing effects on households, through mortgage rates, and on leveraged financial intermediaries.
Cochrane
John Cochrane
Hoover Institution Stanford
Disagree
8
Bio/Vote History
Both costs and benefits of short-term currency movements are over rated. And what to do about it? Absent a peg with ironclad fiscal commitment, propping up or devaluing the currency is not a wise policy.
Cornelli
Francesca Cornelli
Northwestern Kellogg
Disagree
5
Bio/Vote History
The depreciation was due to concerns regarding the fiscal policy which will also affect the long run macro effects. In addition, the entire export policy of the UK has to be reassessed following Brexit.
Diamond
Douglas Diamond
Chicago Booth
Uncertain
4
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Agree
6
Bio/Vote History
It didn't seem to be a managed tradeoff for exports, but rather that it was an unintended adverse fiscal shock that the Bank of England was forced to partially accommodate. The BoE was also left with the task of managing significant spillover risks to financial stability.
Eberly
Janice Eberly
Northwestern Kellogg
Agree
7
Bio/Vote History
Two issues: i) the pound fell endogenously in response to announced fiscal changes, which also have an effect on markets; and ii) any export benefits occur on a longer time scale than the market reaction to fiscal and exchange rate effects.
Gabaix
Xavier Gabaix
Harvard
Uncertain
2
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Uncertain
6
Bio/Vote History
Graham
John Graham
Duke Fuqua
Agree
6
Bio/Vote History
Hansen
Lars Hansen
UChicago
Uncertain
8
Bio/Vote History
Exchange rate movements can signal both long term concerns about future government policy and the need for realignment between import and export prices. The former can be unnecessarily costly in contrast to the latter.
Harvey
Campbell R. Harvey
Duke Fuqua
Uncertain
10
Bio/Vote History
Hirshleifer
David Hirshleifer
USC
No Opinion
Bio/Vote History
Hong
Harrison Hong
Columbia
Agree
6
Bio/Vote History
Studies of debt crises linked to sharp depreciation depending on how debt is structured.
Jiang
Wei Jiang
Emory Goizueta Did Not Answer Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Uncertain
2
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
No Opinion
Bio/Vote History
I have been a member of the Bank of England Financial Policy Committee and we are in our quiet period, so not appropriate for me to be commenting on this.
Koijen
Ralph Koijen
Chicago Booth
Uncertain
3
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
No Opinion
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Agree
4
Bio/Vote History
Ludvigson
Sydney Ludvigson
NYU
Agree
8
Bio/Vote History
Question framed in a potentially misleading way. Currency depreciation in this case appears to be a symptom rather than a cause of economic problems driven by policy missteps that should be the focus of concern
Maggiori
Matteo Maggiori
Stanford GSB
Agree
7
Bio/Vote History
I think the costs of large and disorderly market moves can be large, especially if systemic financial institution get into trouble as a result. The benefit to the UK of a depreciation is hard to assess (the evidence is mixed in the literature) and probably significantly smaller.
Matvos
Gregor Matvos
Northwestern Kellogg
Uncertain
6
Bio/Vote History
Moskowitz
Tobias Moskowitz
Yale School of Management Did Not Answer Bio/Vote History
Nagel
Stefan Nagel
Chicago Booth
Agree
6
Bio/Vote History
Getting inflation under control is a main challenge in the current situation and weak sterling makes this more difficult.
Parker
Jonathan Parker
MIT Sloan
Disagree
8
Bio/Vote History
The value of sterling should decline given changes in inflation and in British economic institutions and growth. While it has overshot due to the BOE's low rates, the external exposures that would amplify this decline into a financial crises do not appear to be present.
Parlour
Christine Parlour
Berkeley Haas
Agree
7
Bio/Vote History
Capital flows much more rapidly than exports.
Philippon
Thomas Philippon
NYU Stern
Uncertain
3
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Agree
3
Bio/Vote History
Roberts
Michael R. Roberts
UPenn Wharton
No Opinion
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg Did Not Answer Bio/Vote History
Seru
Amit Seru
Stanford GSB
Uncertain
5
Bio/Vote History
Depends.
Stambaugh
Robert Stambaugh
UPenn Wharton
Uncertain
1
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs Did Not Answer Bio/Vote History
Stein
Jeremy Stein
Harvard
Agree
7
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Uncertain
5
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth
Agree
8
Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Uncertain
3
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Agree
7
Bio/Vote History
Werner
Ingrid M. Werner
OSU Fisher School
Uncertain
8
Bio/Vote History
Depends on the horizon.
Whited
Toni Whited
UMich Ross School
Disagree
4
Bio/Vote History

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Campbell
John Campbell
Harvard
Agree
7
Bio/Vote History
This happened a century ago with the replacement of the British pound by the US dollar as the world's major reserve currency. Today there is no obvious alternative to the dollar, but a shift in reserve currency structure remains a possibility albeit unlikely.
-see background information here
Cochrane
John Cochrane
Hoover Institution Stanford
Agree
8
Bio/Vote History
Concern about debt sustainability can certainly drive currency lower and inflation higher. "Reserve currency" status is over-rated. EU governments, and Switzerland too can borrow at similar rates and quantities to US.
Cornelli
Francesca Cornelli
Northwestern Kellogg
Uncertain
5
Bio/Vote History
If the concerns are linked to the feasibility of the fiscal policy (as it is in this case) then I would agree, but it depends on that point of view.
Diamond
Douglas Diamond
Chicago Booth
Agree
5
Bio/Vote History
Future depreciation concerns can become self-fulfilling if confidence is lost. This may be due to perceived future loose monetary policy or government debt monetization.
Duffie
Darrell Duffie
Stanford
Agree
8
Bio/Vote History
Is this a "trick question"? Reserve-currency benefits depend on stable prices and a well functioning government securities market, with government bonds that act as a safe haven. Concerns about government finances and debt sustainability clearly don't support those conditions.
Eberly
Janice Eberly
Northwestern Kellogg
Agree
8
Bio/Vote History
The stability and liquidity of a reserve currency rely on relative fiscal and monetary stability, as well as scale, for a global reserve currency.
Gabaix
Xavier Gabaix
Harvard
Agree
8
Bio/Vote History
Goldstein
Itay Goldstein
UPenn Wharton
Agree
7
Bio/Vote History
Graham
John Graham
Duke Fuqua
Agree
8
Bio/Vote History
Hansen
Lars Hansen
UChicago
Strongly Agree
8
Bio/Vote History
Harvey
Campbell R. Harvey
Duke Fuqua
Strongly Agree
9
Bio/Vote History
There are two ingredients for a reserve currency: 1) a large economy and 2) a perception that the economy will be relatively stable in the future. Concerns over debt sustainability inject additional uncertainty. It is well known in finance that additional leverage increases risk.
Hirshleifer
David Hirshleifer
USC
No Opinion
Bio/Vote History
Hong
Harrison Hong
Columbia
Agree
5
Bio/Vote History
Agree with statement theoretically though evidence isn't so clear on this issue.
Jiang
Wei Jiang
Emory Goizueta Did Not Answer Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Agree
5
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Agree
3
Bio/Vote History
Koijen
Ralph Koijen
Chicago Booth
Agree
5
Bio/Vote History
Kuhnen
Camelia Kuhnen
UNC Kenan-Flagler
No Opinion
Bio/Vote History
Lo
Andrew Lo
MIT Sloan Did Not Answer Bio/Vote History
Lowry
Michelle Lowry
Drexel LeBow
Strongly Agree
4
Bio/Vote History
A key factor underlying a reserve currency is trust. Trust is built upon sound government finances and sound policies.
Ludvigson
Sydney Ludvigson
NYU
Agree
8
Bio/Vote History
Lots of factors can come into play (e.g., even if debt sustainability is a concern for the reserve currency, it may be even more of a concern for all the conceivable alternative reserve currencies), but the UK experience and history should at least be instructive
Maggiori
Matteo Maggiori
Stanford GSB
Strongly Agree
10
Bio/Vote History
A loss of investor confidence in the fiscal commitment of a reserve country to maintaining the real value of its debt repayments is the core threat to the status of that currency. At the core, a reserve currency is a fiscal commitment to providing a safe asset.
-see background information here
Matvos
Gregor Matvos
Northwestern Kellogg
Agree
7
Bio/Vote History
The much more uncertain but pertinent question is what triggers debt sustainability concerns of sufficient magnitude.
Moskowitz
Tobias Moskowitz
Yale School of Management Did Not Answer Bio/Vote History
Nagel
Stefan Nagel
Chicago Booth
Agree
8
Bio/Vote History
Parker
Jonathan Parker
MIT Sloan
Strongly Agree
10
Bio/Vote History
Reserves are held in safe assets. Safe assets must be safe in times of crisis. Times of crisis pose fiscal challenges for countries with fiscal imbalances and high debt levels. The debt of a country with little fiscal space to handle crises is not a good reserve asset.
Parlour
Christine Parlour
Berkeley Haas
Agree
7
Bio/Vote History
Sterling used to be a reserve currency until the size of the economy and the rise of the dollar undermined it.
Philippon
Thomas Philippon
NYU Stern
Agree
7
Bio/Vote History
Puri
Manju Puri
Duke Fuqua
Agree
4
Bio/Vote History
For non-US currencies.
Roberts
Michael R. Roberts
UPenn Wharton
No Opinion
Bio/Vote History
Sapienza
Paola Sapienza
Northwestern Kellogg Did Not Answer Bio/Vote History
Seru
Amit Seru
Stanford GSB
Uncertain
5
Bio/Vote History
Depends how large the shocks are that lead to these concerns. Certainly true at the corner.
Stambaugh
Robert Stambaugh
UPenn Wharton
Agree
7
Bio/Vote History
Starks
Laura Starks
UT Austin McCombs Did Not Answer Bio/Vote History
Stein
Jeremy Stein
Harvard
Agree
7
Bio/Vote History
Stroebel
Johannes Stroebel
NYU Stern
Strongly Agree
7
Bio/Vote History
Sufi
Amir Sufi
Chicago Booth
Strongly Agree
8
Bio/Vote History
Titman
Sheridan Titman
UT Austin McCombs
Agree
4
Bio/Vote History
Van Nieuwerburgh
Stijn Van Nieuwerburgh
Columbia Business School
Strongly Agree
10
Bio/Vote History
the global safe haven currency has enjoyed extra fiscal capacity over the past three centuries, but that status switches periodically, and high debt is one factor that can make a contry lose that status.
-see background information here
Werner
Ingrid M. Werner
OSU Fisher School
Uncertain
8
Bio/Vote History
Depends on which currency, Dollar, Euro, Yen.
Whited
Toni Whited
UMich Ross School
Agree
6
Bio/Vote History