Brexit: bouncing through unstable equilibria
- There has been little progress in Brexit negotiations recently as the UK debates unviable positions with itself and the EU is intransigent over the Irish backstop.- The EU’s preference for a soft Brexit seems to be yielding attempts to bounce the UK in that direction. Costs of membership without the benefits of leaving would make it an unstable equilibrium, in my view.
- I continue to expect a hard Brexit and see it as the only stable equilibrium state.
- The MPC is less responsive to Brexit developments than many think, partly because the actions of businesses, households and markets determine the policy response. Stimulus in a bad outcome is best provided in the event, not in anticipation.
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