The effect on Macroeconomic Management in the UK of the Transition from Fixed to Floating Rates

Abstract

A rational expectations model estimated for the UK is used to simulate macroeconomic policy under fixed and floating exchange rates. Under fixed rates inflation and interest rates are effectively set internationally; monetary policy only affects the reserves even in the short run and cyclical variations in fiscal policy are able to influence output in a fairly standard manner. Under floating rates, fiscal and monetary policy have rapid impacts on inflation and interest rates producing unfamiliar financial effects on expenditure which eliminate or reserve the conventional output multipliers. Stabilisation policy is still feasible but has to take account of these effects.

Citation

Minford, P. (1980), "The effect on Macroeconomic Management in the UK of the Transition from Fixed to Floating Rates", Journal of Economic Studies, Vol. 7 No. 2, pp. 69-86. https://doi.org/10.1108/eb002510