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What is devaluation?
What is devaluation?
Devaluation is a monetary policy tool used by countries that implement a fixed exchange rate regime or a semi-fixed exchange rate regime. Devaluation is the reduction of the value of an official currency of an country against other country currencies or against a group of currency values, or at a currency standard. Devaluation is often confused with depression and is exactly the opposite of revaluation.
Devaluation is a tool used by the government or central bank of the fixed country for the relevant currency. One of the most fundamental reasons for devaluation is that the country reduces the value of its money to compensate for trade deficit. Devaluation is to lower the value of currency and to make exports cheaper and become more advantageous in global trade competition. However, imports become more expensive, and domestic households increase demand for products from domestic producers while expecting a reduction in demand for imported products.
Devaluation seems to be a means of positive monetary policy, but there are also negative effects. Making imports more expensive can make domestic production less effective, or making exports cheaper can cause inflation by increasing demand very seriously.