DP177 Sterling Misalignment and British Trade Performance

Author(s):	Charles R Bean
Publication Date:	May 1987
Keyword(s):	Exchange Rates, Exports, Hysteresis, Monetary Policy, Oil Exports, United Kingdom
JEL(s):	122, 311, 421, 431
Programme Areas:	International Macroeconomics, International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=177

In the first part of this paper I use a small macroeconomic model to examine the causes of the appreciation of sterling during 1979-81. Oil takes about half of the blame. Contractionary monetary policies alone do not seem sufficient to explain the rest, but when coupled with adverse supply-side developments they seem capable of explaining both the appreciation and the associated increase in unemployment. In the second part of the paper I examine the possibility that temporary fluctuations in the real exchange rate may have a permanent effect on British export performance. Using data from 1900 to the present I find evidence that is consistent with "hysteresis" effects on both the demand and supply side of the export market.