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  The GEM Project’s Take on Brexit

  By James Annable | May 17, 2019

  Good economic theories help us understand big events as they are happening. What we most want is guidance on how they are likely to play out over time, both the short- and long-run. Good models are especially valuable in circumstances of macro disruptions that lack convincing historical precedent. That is the case with Brexit, the shocking decision of the British electorate to leave the European Common Market. The on-going rending of the UK political fabric is inexorably pushing the country to a once unimaginable hard exit.

  Generalized-exchange macroeconomics, constructed in the GEM Project as a superior alternative to market-centric thinking featured in the mainstream academy, is up to the high standards of good theory. In particular, the model provides reliable answers to the hard-Brexit questions that I get asked.

  Will a hard Brexit cause a collapse in dollar asset prices along the lines of the Great Recession? This is the first question asked about any in-the-news macro disruption. With respect to a hard Brexit, the answer is a confident no. GEM modeling identifies the financial panic at the center of the 2008-09 extreme instability to be rooted in investor/lender uncertainty about the trend prospects for domestic economic stability. It demonstrates that stability expectations are rationally and coherently rooted in the prospects for aggregate nominal demand. (Chapters 2 and 3) It additionally shows that, in 2008, investors/lenders became uncertain about the credibility of the Federal Reserve’s trend full-employment objective. Consequently, as intuitively modeled by Nancy Stokey, investors/lenders became inactive, delaying their acquisition of financial assets until credible market bottoms emerge. (Chapter 6 and 10) Postponing the pursuit of profit opportunities triggered the frightening 2008-09 contraction in total spending. More generally, the Project asserts that robust credibility of government policymakers’ objectives of high trend employment and low inflation is sufficient to prevent nonstationary demand contractions and consequent great recessions/depressions

  Today, by contrast with 2008, the is no meaningful uncertainty about the Fed’s capacity, especially now that it is armed...

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