Sterling silver lining?

Some of my Year 11 students are fully signed up members of Citreon C4 Picasso admirers club. My own Picasso won't be getting its second outing to its homeland this summer because of the collapse of sterling - the Waltons will be holidaying in the UK.

It seems that holiday companies Pontins and Butlins are banking on more of us doing the same. Pontins are investing £50 million in their UK holiday facilities after a 20% increase in summer bookings. And Butlins is moving up market, opening a 'boutique hotel' in Bognor Regis (boutique in Bognor?). Families planning a trip to Cornwall could be disappointed as many holiday cottages are reportedly fully booked. Good illustrations of the impact on business of changes in the exchange rate.

The collapse of serling (the trade-weighted index is down almost 25% from its peak in 2007) is also worth Year 12 economics students exploring. One of questions posed in recent lessons was the relative importance of each of the components of aggregate demand (AD). Inevitably, most attention focused on the importance of consumer expenditure. Such a dramatic fall in the exchange rate, though, can have a significant expansionary impact on AD. Economists have a rule of thumb that each 1% fall in the exchange rate has the same effect on the economy as 0.25% cut in interest rates. If this is right, the collapse of sterling is equivalent to a whopping 6% cut in interest rates. On top of the interest rate cuts announced by the Bank of England, the expansionary impact is incredible.

As the full effects of both the falls in sterling and the interest rate have yet to fully feed through to output, maybe there is a silver cloud on the horizon?

My challenge
What are the parallels between this story and the UK's exit from the Exchange Rate Mechanism (ERM) in the early 1990s?