What Is Devaluation of Currency & How Does It Affect the Economy?

Currency devaluation is when a government or central bank intentionally cuts the value of its currency. They do this to make their money cheaper, boost exports, and support their deficit spending. The thing is, you won't notice the effects right away. It slowly chips away at your purchasing power and causes prices to go up over time.

Why Does Currency Devaluation Happen?

Indeed, there are plenty of reasons why officials enact this policy of currency devaluation. Governments might want to plug trade imbalances and transition to a trade surplus. After a period of deflation, politicians might choose to inject some inflation into the economic landscape. Also, currency devaluation might happen following an economic crisis.

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Effects on the Economy

• Boost exports A weakened currency can amplify exports because a lower currency relative to another one makes it cheaper for foreign buyers to purchase.
• Heighten import costs However, a devalued currency can make imports more expensive because the other currency becomes more expensive, adding to potential inflationary pressures at home.
• Debt management/repayment By inflating the money supply, governments will have freshly created cash to pay off their debts. Unfortunately, this creates a result of paying off the debt but also initiates hyperinflation.
• Impact on foreign investment The positive is that it might lead to investors finding a possibility for potential growth. The negative is that it might deter investment because some markets will become wary of how much central bank intervention there can be in domestic policymaking.

Historical Examples

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Currency Devaluation: The Double-Edged Sword

Unfortunately, for countries that have too much debt or excessive state intervention, governments on the brink of disaster might have no other alternative but to inflate the money supply. Economists assert that tepid currency devaluation can lead to economic advantages. But too much of it can lead to exceptional consequences.

Because of today's volatility in the global economy and worldwide financial markets, it is vital for the typical person to stay up-to-date about economic policies and what side effects there could be for currency valuations.