Monetary Policy and the Sterling Exchange Rate

Abstract

This article introduces the three contributions to the Feature, which address issues raised by the sterling appreciation of 1996–97 and the subsequent prolonged overvaluation. Cobham discusses the MPC's understanding of exchange rate changes and examines policy makers’ responses to the proposal that policy should respond to exchange rate misalignments. Kirsanova, Leith and Wren-Lewis construct a ‘new open economy macroeconomics’ model with international risk sharing shocks, in which the welfare function derived includes a term in the ‘terms of trade gap’. Allsopp, Kara and Nelson investigate the exchange rate-prices pass-through and how imports should be modelled, and draw out the policy implications.