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The effect of exchange rates on prices, wages, and profits: A case study of the United Kingdom in the 1990s

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  • Joseph Gagnon

Abstract

During the 1990s the United Kingdom experienced large and sudden exchange rate movements that had no apparent impact on overall consumer prices. This paper shows that the stability of UK consumer prices was made possible in part by offsetting movements in the price-cost margins of foreign exporters and in part by offsetting price-cost margins in the UK distribution sector. At the same time, UK manufacturers experienced margin swings in the opposite direction, largely due to their role as exporters. Thus, sterling depreciation boosted the profits of UK manufacturers and squeezed the profits of UK distributors, while sterling appreciation had the opposite effects.

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  • Joseph Gagnon, 2006. "The effect of exchange rates on prices, wages, and profits: A case study of the United Kingdom in the 1990s," International Economic Journal, Taylor & Francis Journals, vol. 20(2), pages 149-160.
    • Handle: RePEc:taf:intecj:v:20:y:2006:i:2:p:149-160
    DOI: 10.1080/10168730600756570
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    1. Eichenbaum, Martin & Rebelo, Sérgio & Burstein, Ariel Tomas, 2002. "Why Are Rates of Inflation So Low After large Devaluations," CEPR Discussion Papers 3178, C.E.P.R. Discussion Papers.
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