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CURRENCY DEVALUATION

Presentation · April 2023

DOI: 10.13140/RG.2.2.28320.46083

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 CURRENCY
DEVALUATION

Dr.Abenet Yohannes
Dr.Abenet Yohannes

Devaluation of a currency
occurs when a country's
central bank intentionally
lowers the value of its
Meaning currency relative to other
currencies.
2
 Definitions
According to Blanchard and Johnson (2013),
• Currency devaluation refers to the "deliberate reduction in the value of a country's currency relative
to other currencies" (p. 515).

Dornbusch (1976)
• Defines currency devaluation as "the intentional reduction in the market exchange value of the
domestic currency through official intervention, either in the form of direct government intervention or
in the form of a change in the exchange rate regime" (p. 1141).

Krugman and Obstfeld (2008)

• Define currency devaluation as "a deliberate government policy action that reduces the exchange
value of a nation's currency" (p. 588).

Dr.Abenet Yohannes 3
 Advantages

Boosting export competitiveness:

• A devalued currency makes exports cheaper, encouraging foreign
buyers to purchase more goods and services from the country,
generating more revenue for the country's economy.

Reducing trade deficit:

• Devaluation can help reduce the size of the trade deficit, as more
revenue from exports can be used to pay for imports.

Dr.Abenet Yohannes 4
 Advantages
Encouraging local production:
• A devalued currency makes imported goods more expensive,
discouraging their importation and promoting local production.

Increasing foreign investment:

• A devalued currency can make it more attractive for foreign investors to
invest in the country, as it reduces the cost of operations such as
cheaper labor and lower production costs.

Dr.Abenet Yohannes 5
 Advantages

Improving the balance of payments:

• With earnings from exports increasing and imports becoming expensive
due to devaluation, the country's balance of payments may improve.

Boosting government revenue:

• With increased export revenue, the government can earn more foreign
currency, leading to increased revenue.

Dr.Abenet Yohannes 6
 Advantages
Improving economic growth:
• With increased exports, increased revenue, and government revenue,
economic growth can be improved, leading to an overall improvement in
the standard of living within the country.

Reducing the value of foreign debts:

• Devaluation can help reduce the burden of servicing government debt
denominated in foreign currency.

Dr.Abenet Yohannes 7
 Advantages
Stimulating tourism:
• A devalued currency could make the country comparatively cheaper as a
tourism destination, stimulating the country's tourism sector.

Improving investor confidence:

• Devaluation can help boost investor confidence in the country, as it
shows the government's commitment to economic growth.

Dr.Abenet Yohannes 8
 Disadvantages
• A devalued currency can increase the cost
Higher of imported goods leading to higher
inflation levels, which could be damaging to
inflation the living standards of the local population.

• If a country has a significant amount of

Increased debt foreign debt, devaluation makes it harder to
service these debts, as the cost of servicing
servicing costs them will increase.

Dr.Abenet Yohannes 9
 Disadvantages
• Investors may withdraw their investments
from the country due to concerns about the
Capital flight country's economic stability and increased
financial risk, which could result in capital
flight.

• As imports become more expensive due to

Reduced purchasing a devalued currency, the local population's
power of the local purchasing power can decrease, leading to
social issues like increased poverty levels.
population

Dr.Abenet Yohannes 10
 Disadvantages
• A devalued currency can lead to
Cost of living an increase in the cost of living,
increases which could adversely affect the
country's population.

Reduced • Devaluing a currency could make

foreign investment less attractive
foreign as it increases the risk of investing
investment in the country.

Dr.Abenet Yohannes 11
 Disadvantages
• If local industries cannot compete with
Increased cheaper foreign imports, they may face
financial challenges that could lead to
unemployment downsizing or closure, resulting in increased
unemployment.

• Devaluation can lead to political unrest, as

Political people become frustrated with the effects
of a devalued currency, such as increased
instability prices of goods and services.

Dr.Abenet Yohannes 12
 Disadvantages
• If a country decides to devalue its
Negative impact currency, it may trigger backlash from
on international its trading partners and investors,
negatively impacting international
relations: relations.

• Devaluation can lead to countries

Potential for accusing each other of implementing
currency wars and unfair trade practices, potentially
leading to currency wars and trade
trade conflicts: conflicts.

Dr.Abenet Yohannes 13
 Devaluation, Depreciation, & Deflation
1. Devaluation
• Devaluation refers to the deliberate reduction of a country's currency value relative to other currencies by the
government or its central bank. For instance, if a country's government reduces the exchange rate of its
currency by 10% relative to a foreign currency, devaluation has taken place.
2. Depreciation
• Depreciation is a decrease in the value of an asset, such as currency, compared to its initial or purchase price. It
is a natural phenomenon that comes with time and usage, and is not deliberately caused by the government.
Depreciation can result from factors such as inflation and economic uncertainty, which can lead to less demand
for the asset.

3. Deflation:
• Deflation is a decrease in the general price level of goods and services in an economy, leading to an increase in
the purchasing power of each unit of currency. Deflation usually occurs when there is an oversupply of goods
and services relative to demand, leading to lower prices. Deflation can happen due to a change in consumer
preferences, a decrease in the money supply, too much debt, or poor economic growth.

Dr.Abenet Yohannes 14
 Conclusion

Overall, devaluation is a complex economic policy that can

have a mix of negative and positive effects on a country’s
economy. It is important for policymakers to understand the
potential consequences of a devaluation, including its
impact on the government, businesses, and citizens, and
carefully consider the policies that they wish to implement.

Dr.Abenet Yohannes 15
 References

• Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.

• Dornbusch, R. (1976). Expectations and exchange rate dynamics. The Journal of
Political Economy, 84(6), 1161-1176.
• Krugman, P. R., & Obstfeld, M. (2008). International economics: theory and policy
(8th ed.). Pearson Addison-Wesley.
• Gupta, A., & Khurana, G. (2020). Currency devaluation: a boon or a bane?
International Journal of Engineering & Technology, 9(1.3), 25-28.
• Rebelo, S., & Végh, C. A. (1995). Real effects of exchange-rate-based stabilization:
An analysis of competing theories. NBER Macroeconomics Annual, 10, 125-188.
• Sfeir, R., & Abboud, N. (2020). COVID-19 Response: Currency Devaluation. Global
Journal of Medical Research, 20(3).

Dr.Abenet Yohannes 16
 Dr.Abenet Yohannes 17
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