Economic Viewpoint: Options for UK policy within the ERM

Although the precise timing of the British government's decision to take sterling into the Exchange Rate Mechanism on 8 October was a surprise, the broad features of the decision were not. Indeed, we argued in the June Economic Viewpoint for entry this autumn with broad 6 per cent bands and a high central rate against the DM, illustrated at DM2.95, precisely in line with the outcome. Now that sterling is in the ERM, the conduct of UK macroeconomic policy is profoundly altered, with changes not just in its technical aspects but also in the balance of the supporting institutions. In this Viewpoint, we explore the map of macroeconomic policy in the post-flouting, ERM context.