Must-Read: Maury Obstfeld: A Spanner in the Works

Maury Obstfeld: A Spanner in the Works: An Update to the World Economic Outlook: “Because the future effects of Brexit are exceptionally uncertain…

…the World Economic Outlook Update presents two model-based illustrations of alternative scenarios to the baseline–one that is moderately worse, and another that is much worse. These scenarios are driven by the uncertainty Brexit introduces about the U.K.’s ultimate trade relationship with the remainder of the European Union and the wider world; the length and contentiousness of the negotiations; markets’ difficulty in gauging the resulting depressing effects on demand; and resulting financial tightening leading to widespread banking-sector stress in the euro area…. A main reason we place less weight on these alternative scenarios, especially the more severe one, is that financial markets have proven resilient in the weeks after the referendum, repricing in an orderly fashion to absorb the news. This benign result owes importantly to the market perception–and the reality–of major central banks’ readiness to provide liquidity to markets. But vulnerabilities persist, not least in some of Europe’s banks…