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Economic Outlook 1991–1995: London Business School with Gower Publishing: Forecast Release: ECONOMIC POLICY AFTER THE STERLING DEBACLE
Author(s) -
Currie David,
Dicks Geoffrey
Publication year - 1992
Publication title -
economic outlook
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.1
H-Index - 8
eISSN - 1468-0319
pISSN - 0140-489X
DOI - 10.1111/j.1468-0319.1992.tb00270.x
Subject(s) - economics , recession , credibility , inflation (cosmology) , devaluation , government (linguistics) , battle , exchange rate , economic policy , monetary economics , macroeconomics , political science , law , history , linguistics , philosophy , physics , archaeology , theoretical physics
Now that sterling has withdrawn front the ERM and is once again in free float, the Government must decide on the next stage of policy. Should it seek to rejoin the ERM as quickly as possible or should it prolong the float? We argue that, whichever way the Government moves, devaluation has undone progress on inflation arid irreversibly damaged the credibility of the UK commitment to the ERM ‐ the credibility of the ERM itself has also been damaged, perhaps irretrievably. In these circumstances, the Government should accept the verdict of the foreign exchanges arid switch the focus of its policy to ending the recession by setting interest rates in accordance with the needs of domestic recovery. The inflation costs of such a move should be small, at least initially, and the battle to reduce inflation can be rejoined in earnest arid the pound returned to the ERM when Germany has itself sorted out its unification problems. On the ERM we argue that it mist move either forwards to EMU or back to the crawling peg system of exchange rates that characterised the first half of the 1960s: it cannot remain in its current limbo.