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Viewed from this perspective, the pound has declined by a still significant 13 percent since voters decided that the United Kingdom should leave the European Union.The GSDEER's current estimated equilibrium rate is 1.44 pounds to $1.63, and the FEER's is 0.88 pounds to 0.74 euros, which implies that the pound is now undervalued – by anywhere from 14 percent to 24 percent against the dollar, and by as much as 20 percent against the euro – relative to its notional fair value.Another, complementary interpretation is that the pound's weakness, notwithstanding its potential cyclical benefits, reflects a risk premium on the U.K., owing to its tricky EU exit path and other policy uncertainties.For starters, British policymakers should acknowledge that a declining pound is helpful, but not sufficient, for improving the U.K.'s external position and rebalancing its economy.Second, the pound's daily and weekly gyrations reflect a market assumption that a "hard" Brexit – whereby the U.K. forfeits its EU single-market access in order to restrict immigration – will negatively affect productivity growth. Finally, if there is even a chance that foreign-exchange markets have built in risk premiums for the U.K. (and it appears that there is), policymakers will have to be very careful not to suggest any other changes to the U.K.'s economic-policy framework.
of fiscal policy
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