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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 E. 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 U.K. 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 U.K. distribution sector. At the same time, U.K. manufacturers experienced margin swings in the opposite direction, largely due to their role as exporters. Thus, sterling depreciation boosted the profits of U.K. manufacturers and squeezed the profits of U.K. distributors, while sterling appreciation had the opposite effects.

Suggested Citation

  • Joseph E. Gagnon, 2003. "The effect of exchange rates on prices, wages, and profits: a case study of the United Kingdom in the 1990s," International Finance Discussion Papers 772, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:772
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    References listed on IDEAS

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    1. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    2. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    Keywords

    Foreign exchange rates;

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