 "Lars Peter Hansen")
After Brexit, we have seen liquidity coming out of Europe and flowing into emerging markets such as India. Do you think this trend will continue?
I am hoping that it is temporary. That is going to depend on the conversations that take place between Britain and Europe and how the exit works and what the consequences of the exit are. Potentially, things could be bad or worse for both these countries or they could even be better. Unfortunately, we are not going to know the answer at least for some more time from here on.
You spoke about the correlation between macroeconomy and markets. So where does trade fall into?
It is true that a lot of models that I have looked at are not international enough. Unfortunately, I have not done enough work on it. But, I think, that what’s going to happen now is after Brexit is Britain will become protectionist. The best way is to keep the trade barriers low. I hope it does not happen in the case of Brexit. I agree that trade is important.
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Financial markets are very forward looking. So, investors are making guesses about what they think is going to happen and they are trying to figure out what to do today. That’s how investments work. Usually, financial markets tend to be early signals of what is going to happen in the future because they are forward looking in nature.
Did the financial markets guessed Brexit wrong?
Yes. They did. Sometimes you are wrong just by accident. In this case it was very difficult to get good accurate guesses on Brexit. Maybe people placed too much confidence in some of the exit polls.
Many believe Brexit may have delayed further rate hike by the Federal Reserve. What do you think about it?
The Federal Reserve is already making reference to the Brexit in terms of next round of actions as they are concerned about its consequences. The impact of US monetary policy is somewhat limited. In US a lot of challenges are fiscal challenges. How are we going to regulate financial markets in the future? These are all very important questions and not just short term interest rates in US. I do expect US monetary policy to look at the impact of Brexit and then take further actions.
Banks and financial institutions are set to be more impacted by Brexit. How do you expect this to pan out?
Brexit has thrown a lot of uncertainty in the environment. People will be a lot more cautious now. Right now, London is the hub of financial activity in Europe. If firms pull out their headquarters out of London, that is a possibility, it could have very grave consequences down the road. I think, companies will wait and watch before doing this.
Over nearly a decade we have seen liquidity being pumped in by different central banks. Now, we are seeing negative interest rates in some of the markets. Also, people are talking about helicopter money. Where does it end? Also we are focused on India how should India’s central bank, government play this global scenario?
The central bank (Reserve Bank of India) should continue as it has been focussing on controlling inflation. Much too often people ask central banks to do too much. It’s not in their power to do it. If you really want to do other reforms for Indian economy, government should encourage more foreign direct investment. There have already been big, positive changes there and I hope they could continue. Second, they should look at changing the labour restrictions in order to make it easier for new firms to enter. So, in general, I would like to see central banks to do inflation control and do oversight of financial markets. In recent times, India’s central bank has been focusing on cleaning the balance sheet of banks, which is a very good step in the right direction.
How do you define the scenario of negative interest rates?
There is a limit to how far you can push rates in the negative direction. There is a cost for hoarding cash. There should be a cap on that. And that’s only for risk-free assets, risky assets will always have positive returns.
