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

David Cobham

Economic Journal, 2006, vol. 116, issue 512, F185-F207

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.

Date: 2006
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