The International Sector and Flexible Rates

TLDR: In this article, the UK exchange rate has not been pegged, but has been determined by a managed float: that is, by a foreign exchange market in which the authorities intervene, from time to time, as an additional buyer or seller of foreign exchange.

Abstract: In the previous chapter we looked at the consequences of introducing international trade into our model in the framework of a regime of ‘pegged’ exchange rates. However, since 1972, the UK exchange rate has not been pegged, but has been determined by a ‘managed float’: that is, by a foreign exchange market in which the authorities intervene, from time to time, as an additional buyer or seller of foreign exchange. At this stage we do not wish to discuss why the UK authorities chose to act in this way. We therefore consider only the limiting case of a ‘perfectly clean’ float even though, since the collapse of the Bretton Woods system (the ‘occasionally jumping peg’) most countries’ floats have been more or less ‘dirty’.