Category Archives: Devaluation

Gold Standard and Competitive Devaluations

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The term "competitive devaluations" or "beggar-thy-neighbor" policies refer to monetary policy designed to lower the exchange rate to increase exports and growth (see IE CH 19). More recently these policies have also been referred to as "currency wars" and even financial "weapons of mass destruction." A recent working paper by the World Bank now equates failures of the gold standard in the 1930s to competitive devaluations. Instead of unilateral devaluations, the World Bank document suggests 

The optimal policy response to the Great Depression, in this view, should have been a coordinated, unsterilized devaluation against gold by all countries suffering deflation. In effect, this would have been a coordinated global monetary easing, but without the beggar-thy-neighbor effects on trade.

– How would "coordinated devaluations" across countries have avoided the beggar-thy-neighbor effects

– Can you see any problems with the World Bank's policy prescription?  

 

The New New Thing: Fiscal Devaluation

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An Extenal Devaluation is simply lowering the value of a currency. An Internal Devaluation is trickier, it implies that domestic prices fall (and hence exports become more competitive abroad). Hailed as the the new form of expenditure switching and reducing, we now also have Fiscal Devaluations if internal devaluations are not feasible. 

source 

 

1. Describe the major
thesis, the central idea, or set of ideas in the reading.

2. Use the TB/Y diagram to outline how a fiscal devaluation would work (assume lower prices shift the x-m curve only).  

 

Currency Wars

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The world at war; the weapon: depreciation. Brazilian Finance Minister Guido Mantega has warned in remarks reported from Sao Paulo. "We're in the midst of an international currency war, a general weakening of currency," he said in remarks reported by the Financial Times newspaper. "This threatens us because it takes away our competitiveness." Japan, South Korea and Taiwan have intervened recently to pull down the value of their currencies, the newspaper noted, and the dollar has fallen by about 25 percent so far this year against the Brazilian real. Such a decline increases the price of Brazilian exports on the US market. 

Barry Eichengreen provides a summary of the economic implications of currency wars. Here are a few study questions

 

  • Why is China keeping its exchange rate artifically low?
  • Why are the US and Europe contemplating weaker currencies?
  • How are these policies related to beggar-thy-neighbor effects?
  • What are the alternatives to beggar-thy-neighbor policies?
  • Is it the currency war itself the source of the tensions between the US, Japan, and Europe,
    or is it the execution of the currency war the real problem? Explain    . 
  • Who is the winner in this war? 

 

Bye Bye Bolivar

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The BBC reports that Venezuela slashes value of currency, the bolivar

There is a lot of interesting information in the article

1) Venezuela is moving to a dual exchange rate.

1a) Currently the bolivar is valued (by government decree) at 2.15 to the dollar. Tomorrow, priority imports will have to pay 2.6 bolivar per dollar, a 20% devaluation. Curiously, priority imports are not only "health care imports" but also "public sector imports." hm

1b) All other, "non essential" items will have to use an exchange rate of 4.3 boliar per dollar, which is a 50% devaluation. The government says that this would "limit unnecessary imports," such as "cars, chemicals, petrochemical and electronics."

Turns out Bolivian President Chavez also has a plan to prevent price increases despite the fact that "unnecessary" imports have just gotten 50% more expensive. Venezuela's President, Hugo Chavez, has said troops will seize control of any business that raise prices in response to the devaluation of its currency. He said there was no reason for prices to go up, and speculators' businesses

Why do countries have to devalue their currencies? Venezuela is an oil exporter. Why does it have balance of payments problems? 

Turns out the country is no stranger to currency crises.  Although last time the government blamed it on contagion caused by Argentina's malaise (that was in 2002, so another installment of the Argentinean  telenovela than the one unfolding right now).