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FEERs and the ERM∗

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  • Williamson, John

Abstract

A number of economists, including the author, were critical of the central rate that was chosen when sterling entered the ERM in October 1990, on the ground that it overvalued the pound. Specifically, the central rate against the other ERM currencies implied a higher value for the pound than that yielded by calculations of ‘fundamental equilibrium exchange rates’ (FEERs).The present paper aims to explain the concept of the FEER, introduced by the author in Williamson (1983), and argues that it provides the right criterion for assessing whether a currency is correctly valued. It also sketches the evidence for believing the pound's ERM central rate to be above the FEER. A final section considers the policy implications of the finding that sterling is overvalued.

Suggested Citation

  • Williamson, John, 1991. "FEERs and the ERM∗," National Institute Economic Review, National Institute of Economic and Social Research, vol. 137, pages 45-50, August.
    • Handle: RePEc:cup:nierev:v:137:y:1991:i::p:45-50_4
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