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The World Economy

Published online by Cambridge University Press:  26 March 2020

Ray Barrell ,
Nigel Pain  and
Julian Morgan
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Extract

The pattern of real exchange rates has changed significantly since February. Our currency forecasts at that time were in line with the implied forward rates in financial markets, with the yen projected to appreciate slowly against the dollar, rising from 100 to the dollar in the first quarter of 1995 to around 90 to the dollar in 1997. Within Europe, we projected a further small appreciation of the D-mark and a continuing depreciation of the lira and the peseta. Overall, we expected ‘real exchange rates to stay approximately stable’. In the event, the yen rose strongly in March and April to around 80 to the dollar, while the D-mark rose from around 1.50 to 1.38 to the dollar. At the same time, the lira/D-mark exchange rate fell by over 10 per cent and the Exchange Rate Mechanism was placed under renewed strain, with both the peseta and the escudo being devalued. As a result, the Japanese and US real effective exchange rates are respectively 15 per cent higher and 7 per cent lower than we had previously expected. These developments also had a wider impact on financial markets. The discount rate was cut in Japan and Germany and long-term rates rose in Italy and Spain. Equity prices fell sharply in those countries with appreciating currencies and jumped up in most of the countries whose exchange rate has depreciated.

Type
Articles
Information
National Institute Economic Review , Volume 152 , May 1995 , pp. 29 - 59
Copyright
Copyright © 1995 National Institute of Economic and Social Research

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Footnotes

∗

We are grateful to Andrew Britton, John Arrowsmith and Garry Young for helpful comments and discussions and to Anne Perrin and Sarah Leeming for their help with the database and charts. The forecast was completed on May 4 1995.

References

Notes

(1) European Economy; Supplement B, Business and Consumer Survey Results, No 3, March 1995.

(2) There is a precedent for such a liberal interpretation of the fiscal criteria. In 1994 the Commission decided not to initiate the excessive deficit procedure in respect of Ireland, despite its debt ratio of over 90 per cent. However the Commission's interpretation on these matters may well be challanged by those opposed to monetary union.

(3) However, Italian unemployment data has suffered from a number of redefinitions in recent years, making it hard to pinpoint underlying trends.