The actual statistics and regression of Black Wednesday

Data was taken from DataStream Advance version 3.5 and the estimation sample covers the period from January 1985 to September 2000.Estimation: the results were given by OLS methodology and IV estimation using PC-Give.

The most interesting figure is perhaps the coefficient of variation of inflation rate. During pre –ERM, the influence of the inflation rate was the greatest one compared to the rest with 0.29. Moreover, during the short period the UK pegged its sterling to Deutsch Mark, the coefficient of variation of inflation rate reached 0.25 associated by the highest average of 6.4. Albeit, the following period saw more stable circumstances with 0.13 and around 0.35 in coefficient of variation and standard deviation of inflation rate respectively. It can deduce that the UK monetary policy has been becoming more stable after ERM and the Black Wednesday.

From 1985 to 1991, the UK LIBOR seemed to dominate both US and Germany. But the condition did not last long because just in the year of Black Wednesday, 1992, the German cut over UK LIBOR line at just under 13% and had kept the highest position until the end of 1994. To explain the change, George Soros is likely the best answer.

The difference existed obviously between the Pre-ERM and Post-ERM Reaction function line. While before 1990, the reaction function line tended to stick on actual interest rate, and therefore, the regression could explain robustly the actual interest rate from 1985 to 1990. It can say that during pre-ERM, the British Government monetary policy followed market free forces.

But the Black Wednesday was one of the main reasons that turned the reaction function to unbounded circumstance before 1992, post-ERM reaction function. However, the dash line tended to stick on the actual interest rate after 1992. This implied that the monetary policy of British Government had corrected its fail as the table above showed.

Reference:
The article used figures and table from dissertation of Christopher Adam et al, 2011,“External influences and institutional constraints on UK monetary policy, 1985-2000”.