Economic-How do other countries devalue their currencies?

Countries devaluing their currencies, only if it no other way, the economic past – their own error or error, to correct their predecessors.

The evils of a devaluation are always in equal or greater to their use.

It is true, yes promotes exports and imports to discourage some extensions and for a limited period of time. How the depreciation undermine itself through higher inflation also manifests this temporary relief. Described in a previous article in this work have I why governments use this radical measure. This article focuses on how to do it.

A Government may be forced to devalue a trade deficit of doom. Thailand, Mexico, Czech Republic – validate all their strong, voluntarily or not, if its trade deficit exceeded 8% of GDP. You can decide to devalue collected taxes as part of a series of measures, which probably includes the freezing of salaries, the Government spending and by the Government for the provision of public services. This was partially in the case of Macedonia. In extreme cases where the Government refuses, the economic difficulties of the market – signals react can be forced devaluation. Who and international speculators buy foreign currency from the Government, so that its reserves are depleted and have no money or the staple food and other necessities to import.

This forced manner the Government has no other choice than to devalue and again buy a high price of the currencies, which were sold to speculators at low prices.

In general there are two systems to know the exchange rates: fixed and floating.

In the floating system helped the currency against other currencies fluctuate freely and depends on the market freely regulated market its exchange rate on a currency is forcing national (or international). These parts will be not not necessarily fully convertible to, but a certain amount of free convertibility is a conditio sine qua non.

In the stationary system vary prices in the Middle usually (from the Central Bank or the transformation in the role of the Central Bank takes box). The rates are determined from time to time (usually daily) and revolve around a “parity” with very little changes.

Life is more complex than any economic system, there are no “pure cases”.

Even in systems of variable interest rates intervention central banks to protect of their currency or move to an exchange rate is favorable (for the economy) or the invisible hand of the market is “fair.” often the central banks “better to know handcuffs”. This usually leads to disastrous consequences (and love you breath). Suffice it to mention the disaster of the pound sterling in 1992 and the billions of dollars, by the night of Soros Arbitrajista-Especulador – a direct result of the wrong policy and arrogance.

Release of exchange rates are considered protective against the deterioration of terms of trade.

If your drop prices to export or import price – surge protection will the exchange rate be adjusted the new flow of foreign currency. The devaluation leads, will the balance recover.

Variable types are foreigners as well as protection against the “hot” (speculative) capital, the quick profit and disappear to make search. Since the purchase of the currency speculators must pay more due to an adjustment to the higher exchange rate. On the contrary, if they try their advantage, which is sanctioned by a new kind of change.

The variable interest rate is ideal for countries with export prices and volatile speculative capital movements. This characterizes the most emerging markets (also known as the third world).

It seems surprising that only a small minority of these States has them until their prices high inflation recalled. Nothing more than a flat rate (as well as the coherent economic policy and prudent), to nip inflation expectations. fixed prices help continue a constant level of foreign exchange reserves, at least, if the Government does not good macroeconomic management. It is impossible to overestimate the importance of stability and predictability, the composed packages: investors, entrepreneurs and marketers for the future plan, through cover to protect and focus on long-term growth.

Leave a Reply