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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.
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of a nation’s currency under a fixed exchange rate system, with both serving different economic
goals. Devaluation is the active decrease of a currency’s value compared to foreign currencies.
Devaluation can help a country to become more competitive in exports markets as it makes
domestic products cheaper for foreign consumers, potentially improving the trade balance. By
making exports more affordable and imports costlier, we can shape our trade dynamics,
promoting foreign consumption of domestic products and an inducing domestic consumer to
favor local goods over expensive imported counterparts. In the case of countries with debt in
their own currency, devaluation can provide an effective real debt reduction, thereby alleviating
pressure to pay (Carbaugh, 2019).
On the other hand, revaluation is the formal rise in a currency’s value compared to other
foreign currencies. By bringing cost of imports down, a strong currency can help contain
domestic inflation as well. Also,those countries experiencing structural balance of payments
surpluses can benefit by revaluation in the sense that it can increase the price of exports and
decrease the price of imports and, thus, correct this imbalance in trade (Levy Yeyati, 2006).
So here are a few situations that a nation might want to devalue its currency. The first
situation is persistent trade deficits so that to promote exports at reduced imports (Carbaugh,
2019). Another situation is high unemployment which forces demand for domestically
manufactured goods, maybe creating jobs. In addition, debt repayment challenges help to
reduce the real burden of debt denominated in the domestic currency. Nonetheless,
devaluation creates risks of its own, such as inflationary upward pressures and diminished
investor confidence (Nenovsky & Hristov, 2002).
The term currency board refers to a monetary authority that sets the official exchange rate of
the national currency to that of a foreign currency, and that holds full reserves to guarantee that
the national currency is always convertible. An example is Hong Kong, which has pegged its
dollar to the U.S. dollar (Hanke & Schuler, 1994). There are several reasons developing countries
might choose currency boards over full dollarization. A currency board enables a country to
have its own currency, which can help maintain some sense of national identity and gives it the
ability to exercise at least limited control over its monetary policy. Moreover, a country that
issues its own currency earns seigniorage (the profit from the creation of money), which would
be lost in dollarization. One potential benefit of simply converting back to a currency board
system, such as the one once used in Argentina, is that it clearly offers more flexibility — or reestablishment — some time in the future, compared with stopping dollarization, which typically
cannot be undone. Dollarization, on the other hand, means using a foreign currency (e.g., US
dollar) as the official currency resulting in a loss of monetary policy autonomy and seigniorage
(De Nicoló et al. 2005).
Carbaugh (2019) discusses that such fixed exchange rate systems, such as that of currency
boards, can provide stability and reduced inflation, but can also limit monetary policy flexibility.
He also discusses the trade-offs between maintaining monetary sovereignty and attaining
economic stability, elucidating the complexities in opting for either currency boards or
dollarization. Findings suggest currency boards believed to reduce inflation in developing
countries and build credibility But they can also curb economic growth through rigid monetary
policies. However, currency boards do provide greater flexibility compared to dollarization, but
like the latter, a currency board needs an exceptionally strong fiscal discipline in operation
(Baliño et al., 1999).
In short, currency devaluation and revaluation are economic adjustments used to achieve
specific economic objectives, with varying effects and consequences. Even developing states can
use currency boards, with many being able to shop some monetary control at the same time as
gaining stable economies from these arrangements, given stability in the arrangements.
References
Baliño, T. J. T., Bennett, A., & Borensztein, E. (1999). Monetary policy in dollarized
economies. IMF Occasional Paper, 171. International Monetary Fund.
Carbaugh, R. J. (2019). International economics (17th ed.). Cengage Learning.
De Nicoló, G., Honohan, P., & Ize, A. (2005). Dollarization of the banking system: Good or
bad? IMF Working Paper, WP/05/52. International Monetary Fund.
Hanke, S. H., & Schuler, K. (1994). Currency boards for developing countries: A handbook.
International Center for Economic Growth.
Levy Yeyati, E. (2006). Financial dollarization: Evaluating the consequences. Economic Policy,
21(45), 61–118.
Nenovsky, N., & Hristov, K. (2002). New currency boards and discretion: Empirical evidence from
Bulgaria. Economic Systems, 26(1), 55–72.
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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