Rate of Return
Today Demos launches a new paper looking at the depreciation of the pound following Brexit.
The consensus view is that this post-Brexit flash crash has damaged Britain’s economy. However, some economists suggest an overly strong pound has held Britain back – and that a weaker currency provides the best monetary platform for rebalancing our economy beyond Brexit.
Our paper assesses the evidence base for this argument, exploring the key debates surrounding the merits of depreciation – on trade elasticities, inflation and its potential impact on the social rate of return.
We find the evidence to be more mixed than the consensus view suggests – whilst the pass-through to inflation is a clear risk, we believe there are also strong grounds for thinking depreciation could improve the UK’s trade position (i.e. satisfy the Marshall-Lerner condition).
Therefore, we conclude it is time to take the case for a weaker currency seriously and discuss it as a legitimate alternative in the debate about our future.
Read the paper in full here