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The Overvaluation of Sterling Since 1996: How the Policy makers Responded and Why

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  • David Cobham

Abstract

A large and sustained nominal appreciation in 1996-8 led to a serious and continuing overvaluation of sterling which has been associated with severe pressure on the manufacturing sector. The policy makers had difficulty in understanding past and forecasting future movements of sterling. They considered, but rejected, suggestions for foreign exchange market intervention and suggestions that interest rates should be set differently to reduce the overvaluation and relieve pressure on the tradable goods sector. One reason was that the exchange rate might react to such decisions in an erratic way. But if that is so the monetary framework needs to be revisited. Copyright 2006 Royal Economic Society.

Suggested Citation

  • David Cobham, 2006. "The Overvaluation of Sterling Since 1996: How the Policy makers Responded and Why," Economic Journal, Royal Economic Society, vol. 116(512), pages 185-207, June.
    • Handle: RePEc:ecj:econjl:v:116:y:2006:i:512:p:f185-f207
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    References listed on IDEAS

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    1. Cobham, David, 2002. "The Exchange Rate as a Source of Disturbances: The UK 1979-2000," National Institute Economic Review, National Institute of Economic and Social Research, vol. 181, pages 96-112, July.
    2. repec:bla:scotjp:v:46:y:1999:i:5:p:570-95 is not listed on IDEAS
    3. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
    4. Christopher Allsopp, 2002. "Macroeconomic Policy Rules in Theory and in Practice," Discussion Papers 10, Monetary Policy Committee Unit, Bank of England.
    5. Christopher Allsopp & Amit Kara & Edward Nelson, 2006. "U.K. inflation targeting and the exchange rate," Working Papers 2006-030, Federal Reserve Bank of St. Louis.
    6. Bob Anderton, 1999. "UK Trade Performance and the Role of Product Quality, Innovation and Hysteresis: Some Preliminary Results," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(5), pages 570-595, November.
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    Cited by:

    1. Abdul Rashid & Muhammad Akram, 2017. "Trade Competitiveness and Employment: Job Creation or Job Destruction," International Economic Journal, Taylor & Francis Journals, vol. 31(2), pages 245-296, April.
    2. Ram Sharan Kharel & Christopher Martin & Costas Milas, 2010. "The Complex Response Of Monetary Policy To The Exchange Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 103-117, February.
    3. von Hagen, Jürgen & Kube, Sebastian & Selten, Reinhard & Pope, Robin, 2006. "Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them," Bonn Econ Discussion Papers 28/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. David, Cobham, 2013. "Monetary policy under the Labour government 1997- 2010: the first 13 years of the MPC," SIRE Discussion Papers 2013-23, Scottish Institute for Research in Economics (SIRE).
    5. Pope, Robin, 2007. "Beggar Thy Neighbour: Exchange Rate Regime Misadvice from Misunderstandings of Mundell (1961)," Bonn Econ Discussion Papers 1/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    6. Robin Pope & Reinhard Selten & Johannes Kaiser & Sebastian Kube & Jürgen Hagen, 2012. "Exchange rate determination: a theory of the decisive role of central bank cooperation and conflict," International Economics and Economic Policy, Springer, vol. 9(1), pages 13-51, March.
    7. Riccardo DiCecio & Edward Nelson, 2010. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," NBER Chapters, in: Europe and the Euro, pages 415-439, National Bureau of Economic Research, Inc.
    8. David Cobham, 2013. "Monetary policy under the Labour government: the first 13 years of the MPC," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(1), pages 47-70, SPRING.
    9. Pope, Robin & Selten, Reinhard & Kaiser, Johannes & Kube, Sebastian & von Hagen, Jürgen, 2007. "The damage from clean floats: From an anti-inflationary monetary policy," Bonn Econ Discussion Papers 19/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    10. Pope, Robin & Selten, Reinhard & Kube, Sebastian & von Hagen, Jürgen, 2009. "Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency," Bonn Econ Discussion Papers 26/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. repec:rim:rimwps:37-07 is not listed on IDEAS
    12. Pope, Robin & Selten, Reinhard & Kube, Sebastian & Kaiser, Johannes & von Hagen, Jürgen, 2007. "Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict," Bonn Econ Discussion Papers 18/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    13. Pope, Robin & Selten, Reinhard & Kaiser, Johannes & von Hagen, Jürgen, 2006. "The Underlying Cause of Unpredictability in Exchange Rates and Good Models of Exchange Rate Regime Selection: Field and Laboratory Evidence," Bonn Econ Discussion Papers 27/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    14. Pope, Robin & Selten, Reinhard & Kube, Sebastian & von Hagen, Jürgen, 2009. "Prominent Numbers, Indices and Ratios in Exchange Rate Determination and Financial Crashes: in Economists’ Models, in the Field and in the Laboratory," Bonn Econ Discussion Papers 18/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    15. Robin Pope, 2009. "Beggar‐Thy‐Neighbour Exchange Rate Regime Misadvice from Misapplications of Mundell (1961) and the Remedy," The World Economy, Wiley Blackwell, vol. 32(2), pages 326-350, February.

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