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Reply to discussion (Exchange Rate Systems and Currency Crises)
Q – Please read the discussion Attached and prepare a Reply to this discussion post with comments that further and advance the discussion topic.
The reply needs to be substantial and constructive in nature. it should add to the content of the post and evaluate/analyze that post Discussion
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 200 words.
economic conditions, wielding impacts on both debt status and trade balances. Essentially,
devaluation refers to the deliberate reduction in the value of a country’s currency concerning
other currencies or a predetermined standard (Carbaugh, 2019). It is a downward adjustment of
a nation’s currency value, typically employed as a monetary policy tool, particularly for
countries operating under fixed or semi-fixed exchange rate regimes.
One of the primary consequences of devaluation is the decrease in interest rates within the
country. While this can be advantageous in reducing debt payments, it also has the
consequence of potentially diminishing the flow of foreign investments into the country.
However, the strategic devaluation of a currency can significantly improve the country’s trade
dynamics. By making its exports more attractive to foreign buyers, a devalued currency
stimulates an increase in exportation. Simultaneously, it renders imports more expensive in
comparison to the country’s currency, making them less appealing to domestic consumers. This
dynamic shift results in a contraction of imports and an expansion of exports, thereby correcting
trade deficits or amplifying trade surpluses (Cheng, 2020).
The effectiveness of devaluation is contingent on specific conditions. For instance, if a country
faces elastic demand and possesses a favorable import-export structure, devaluation can be a
viable strategy. Moreover, if the production costs within a country are notably high, making its
goods and services comparatively expensive, devaluing the currency becomes imperative to
restore competitiveness in the global market. In this context, devaluing the currency helps to
offset the increased cost of production by reducing the perceived cost of domestic goods in
foreign markets.
Conversely, the concept of currency revaluation stands as the inverse of devaluation, involving
an increase in the value of a country’s currency. Revaluation is often deemed necessary to
maintain a pegged exchange rate, finding equilibrium in the price of the
currency. Thisadjustment impacts interest rates, the competitiveness of the economy, and can
have adverse effects on the trade balance. When a currency is revalued, exports become more
expensive for other nations, potentially leading to a surge in imports, thus contributing to trade
imbalances.
In the realm of fixed exchange rate regimes, a currency board represents an extreme form. This
institution is empowered to instruct the backing of all units of the domestic currency in
circulation with a foreign currency, ensuring a stable exchange rate. The currency board
promotes both trade and investment by providing a secure and predictable exchange rate.
Importantly, it safeguards the domestic economy from potentially detrimental actions by
political authorities, preventing an unwarranted increase in the money supply. While the
principle of dollarization completely eliminates the risk of devaluation, it may not contribute to
income generation or derive benefits from investing in a country’s reserves.
Djibouti serves as an illustrative example of a country successfully operating under a currency
board arrangement since 1949. Maintaining a stable pegged currency, the Djibouti franc, to the
US dollar, the country’s disciplined monetary policy and effective inflation control exemplify the
advantages of a currency board (Aman & Nenovsky, 2021).
In conclusion, the deliberate devaluation of currency emerges as a multifaceted strategy with
far-reaching implications on a nation’s economic landscape. While it can address trade
imbalances, boost exports, and reduce debt, the efficacy of devaluation hinges on various
economic factors. Revaluation, in contrast, poses challenges to trade balances and economic
competitiveness. The extreme form of fixed exchange rate regimes, exemplified by currency
boards, offers stability but requires careful governance. Djibouti’s sustained success with a
currency board underscores the potential benefits of this arrangement in promoting economic
stability and growth.
References
Aman, M., & Nenovsky, N. (2021). Rent and longevity of Djibouti’s currency board. A political
economy of the monetary regime. Mondes en developpement, 194(2), 7-28.
Carbaugh, R. J. (2019). International economics. Cengage Learning.
Cheng, K. M. (2020). Currency devaluation and trade balance: Evidence from the US services
trade. Journal of Policy Modeling, 42(1), 20-37.
Reply to discussion (Exchange Rate Systems and Currency Crises)
Q – Please read the discussion Attached and prepare a Reply to this discussion post with comments that
further and advance the discussion topic.
The reply needs to be substantial and constructive in nature. it should add to the content of the post and
evaluate/analyze that post Discussion
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 200 words.
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