Hostname: page-component-77c89778f8-gvh9x Total loading time: 0 Render date: 2024-07-18T23:44:44.826Z Has data issue: false hasContentIssue false
  • English
  • Français

Properties of the fundamental equilibrium exchange rate in the Treasury model

Published online by Cambridge University Press:  26 March 2020

Keith B. Church
Keith B. Church*
Affiliation:
ESRC Macroeconomic Modelling Bureau, University of Warwick, CoventryCV4 7AL
Get access Rights & Permissions [Opens in a new window]

Abstract

This article calculates the equilibrium real exchange rate for the UK economy. The long-run trade and supply side relationships from HM Treasury's model are used to estimate the level of the real exchange rate consistent with the UK economy growing at its ‘natural’ rate while achieving a sustainable current account position. The model shows that the real exchange rate associated with macroeconomic equilibrium lies well below the actual rate for most of the 1990s. This result has important implications for possible UK participation in the single European currency as, once the nominal exchange rate is fixed, overvaluation can only be corrected by holding UK inflation lower than that elsewhere. Achieving this may be costly in terms of jobs and output.

Type
Articles
Information
National Institute Economic Review , Volume 169 , July 1999 , pp. 96 - 104
Copyright
Copyright © 1999 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

∗

I am grateful for the advice and comments of Ray Barrell and James Sefton although the interpretation of the results remains my responsibility. This research is supported by a grant from the Economic and Social Research Council.

References

Barrell, R.J. and Sefton, J.A. (1998), ‘Fiscal policy, real exchange rates and monetary union’, National Institute of Economic and Social Research.Google Scholar
Bean, C.R. (1994), ‘European unemployment: a survey’, Journal of Economic Literature, 32, 573–619.Google Scholar
Chan, A., Savage, D. and Whittaker, R. (1995), ‘The new Treasury model’, Government Economic Service Working Paper No.128 (Treasury Working Paper No.70), London, HM Treasury.Google Scholar
Church, K.B. (1992), ‘Properties of the fundamental equilibrium exchange rate in models of the UK economy, National Institute Economic Review, No.141, 62–70.Google Scholar
Church, K.B., Mitchell, P.R. and Wallis, K.F. (1997), ‘Comparative properties of models of the UK economy’, National Institute Economic Review, No.161, 91–100.CrossRefGoogle Scholar
Church, K.B., Mitchell, P.R., Smith, P.N. and Wallis, K.F. (1993), ‘Comparative properties of models of the UK economy’, National Institute Economic Review, No.145, 87–107.Google Scholar
Williamson, J. (1983), The Exchange Rate System, Policy Analyses in International Economics, 5, Washington, Institute of International Economics.Google Scholar
Williamson, J. (1991), ‘FEERs and the ERM’, National Institute Economic Review, No.137, 45–50.Google Scholar
Wren-Lewis, S. (1992), ‘On the analytical foundations of the fundamental equilibrium exchange rate, in Hargreaves, C.P. (ed.), Macroeconomic Modelling of the Long Run, Aldershot, Edward Elgar, 323–8.Google Scholar
Wren-Lewis, S. and Driver, R.L. (1998), Real Exchange Rates for the Year 2000, Policy Analyses in International Economcs, 54, Washington, Institute of International Economics.Google Scholar
Wren-Lewis, S., Westaway, P., Soteri, S. and Barrell, R. (1991), ‘Evaluating the UK's choice of entry rate into the ERM’, The Manchester School, 59, supplement, 1–22.CrossRefGoogle Scholar