Sterling and the External Balance
This paper analyzes the behavior of the current account and the exchange rate in the British economy during the 1970's, and discusses the outlook, as influenced by the availability of oil revenues, for exchange rate developments during the 1980's.Both trade and exchange rate behavior are affected by, and in turn affect, general macroeconomic developments and policy problems. In the short term, the major macroeconomic problems of the British economy are its high rates of inflation and unemployment. Over the long term, the underlying problem for the British economy is its slow productivity growth relative to the major OECD economies (except that of the United States).Two major themes permeate this paper. First, the accepted laws of economics continue to work in the United Kingdom; for example, low domestic demand and increased British competitiveness improve the balance of payments and slow the fall of the exchange rate. Second, Britain's achievement of macroeconomic goals depends upon the behavior of both nominal and real wages. The inflation rate will remain low only if the rate of change of nominal wages does; full employment with stable prices and current account balance will be achieved only if real wage growth is restrained or productivity growth increases.
Document Object Identifier (DOI): 10.3386/w0327
Published: Dornbusch, Rudiger and Fischer, Stanley. "Sterling and the External Balance ." Britain's Economic Prospects Revisited, edited by Richard Caves and Lawrence Krause. Washington, D.C.: The Brookings Institution, 1980.
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