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Is There Life Outside the ERM? An Evaluation of the Effects of Sterling's Devaluation on the UK Economy

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  • Hughes Hallett, Andrew J
  • Wren-Lewis, S

Abstract

This paper makes a quantitative assessment of the impact of sterling s exit from the exchange rate mechanism (ERM) in September 1992, taking as given other events and other countries' policies as they happened. To do this we use two different econometric models, each with its own information set. One is a UK model using current (to 1995) information; the other a multicountry model with information as known in early 1992. We therefore examine the question with the benefit of hindsight and as the policy makers could have seen it at the time. The results are the same. Sterling's exit produced a period of recovery, real growth and little extra inflationary pressure. Excess capacity and competition in the labour markets may have led to lower inflation pressures. However, it was lower interest rates which proved growth creating in the UK, rather than sterling's devaluation, which proved growth diverting. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Hughes Hallett, Andrew J & Wren-Lewis, S, 1997. "Is There Life Outside the ERM? An Evaluation of the Effects of Sterling's Devaluation on the UK Economy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 199-216, July.
    • Handle: RePEc:ijf:ijfiec:v:2:y:1997:i:3:p:199-216
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    Cited by:

    1. Woo, Kai-Yin, 1999. "Cointegration analysis of the intensity of the ERM currencies under the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(4), pages 393-405, November.
    2. Hughes Hallett, Andrew & Richter, Christian, 2004. "Estimating an equilibrium exchange rate for the dollar and other key currencies," Economic Modelling, Elsevier, vol. 21(6), pages 1117-1144, December.

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