Sterling Exchange Rates 1951—1976: a Casselian Analysis

Abstract

This article presents two models of sterling exchange rates, for which the starting-point is Cassel's synthesis of the purchasing power parity and the asset demand theory of exchange rate determination. The first model generates estimates of equilibrium exchange rates in 1970; the second is designed to explain subsequent monthly deviations of actual rates from these notional 1970 rates and so to provide a system for short-term forecasting of ‘effective’ exchange rates in terms of variables defined in the National Institute's larger model of the economy. Monthly forecasting equations for other major currencies are also estimated and the predictive power of the monthly model is tested—with encouraging results—over the period May-November 1976.