As domestic growth occurs, imports increase because Y increases - shifting the forex supply curve (of sterling) to the right, while exports possibly tend to fall, as domestic demand captures previous exports and as the economy reaches full capacity - shifting the demand curve for sterling to the left.
The consequence is a BoT deficit, which, if not offset by increasing capital inflows or reduced outflows, gives rise to a BoP deficit.
There is thus pressure for devaluation of sterling (under fixed exchange rate regimes) or for depreciation of the exchange rate - making imports more expensive and exports more competitive, and also tending to be inflationary as import prices rise.
However, there is also some contractionary or deflationary pressure
both from the fact that imports (leakage from the Circular Flow of Income) increase faster than exports (and injection);
and also from the official financing of the BoP deficit - which involves the Bank of England selling Forex reserves in exchange for sterling, and thus absorbing some sterling from the domestic economy, reducing the money supply and increasing interest rates. This Monetary impact of management of the BoP and Forex market gives a different perspective on the macroeconomic effects of the foreign sector - the "German" experience
The consequence is a BoT deficit, which, if not offset by increasing capital inflows or reduced outflows, gives rise to a BoP deficit.
There is thus pressure for devaluation of sterling (under fixed exchange rate regimes) or for depreciation of the exchange rate - making imports more expensive and exports more competitive, and also tending to be inflationary as import prices rise.
However, there is also some contractionary or deflationary pressure
both from the fact that imports (leakage from the Circular Flow of Income) increase faster than exports (and injection);
and also from the official financing of the BoP deficit - which involves the Bank of England selling Forex reserves in exchange for sterling, and thus absorbing some sterling from the domestic economy, reducing the money supply and increasing interest rates. This Monetary impact of management of the BoP and Forex market gives a different perspective on the macroeconomic effects of the foreign sector - the "German" experience
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