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Between 1995 and 1997 the effective exchange rate of the pound sterling appreciated by 20%. What factors might explain this increase in the value of the pound?
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5. Between 1995 and 1997 the effective exchange rate of the pound sterling appreciated by 20%. (a) What factors might explain this increase in the value of the pound? There are several reasons that contribute to the appreciation of the pound. INTEREST RATES Interest rates have a large effect in a world where financial capital can move freely between countries. If for example the UK interest rates are high relative to elsewhere this attracts inflows of money into the UK seeking to take advantage of the high interest rates. This "interest differential" boosts the demand for the currency and can cause its value to rise. ECONOMIC GROWTH Countries experiencing a rapid economic growth often find that their exchange rate is strengthening. Traders in the currency markets may take the rapid growth to be a sign of general economic growth and "mark up" the value of the currency as a result. Also economies with strong "export-led"...
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