Working Paper: CEPR ID: DP177
Authors: Charles R. Bean
Abstract: In the first part of this paper I use a small macroeconomic model to examine the causes of the appreciation of sterling during 1979-81. Oil takes about half of the blame. Contractionary monetary policies alone do not seem sufficient to explain the rest, but when coupled with adverse supply-side developments they seem capable of explaining both the appreciation and the associated increase in unemployment. In the second part of the paper I examine the possibility that temporary fluctuations in the real exchange rate may have a permanent effect on British export performance. Using data from 1900 to the present I find evidence that is consistent with "hysteresis" effects on both the demand and supply side of the export market.
Keywords: exchange rates; exports; hysteresis
JEL Codes: 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contractionary monetary policies (E52) | appreciation of sterling (F36) |
| adverse supply-side developments + contractionary monetary policies (E65) | appreciation of sterling (F36) |
| appreciation of sterling (F36) | increase in unemployment (J64) |
| temporary misalignment of exchange rate (F31) | impact on tradeable goods sector (F69) |
| temporary fluctuations in real exchange rate (F31) | permanent effects on British export performance (F69) |
| hysteresis effects (E32) | longer recovery from temporary overvaluation (E32) |