DP177 | Sterling Misalignment and British Trade Performance

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01/05/1987

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Abstract

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.