How do you Stop Currency Devaluation?
By BYJU'S Exam Prep
Updated on: November 9th, 2023
Currency Devaluation can be avoided by international organizations such as the International Monetary Fund (IMF) assisting countries in coordinating their foreign exchange policies and trade. Currency depreciation is harmful to any country’s economy. It has an impact not only on the economy but also on the way of life of the people who live in that country.
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Ways to Stop Currency Devaluation
Article IV of the IMF Charter provides information to avoid exchange rate manipulation in order to prevent nations from gaining an unfair competitive advantage through the devaluation of their currencies. The government could devalue the currency through a variety of policies.
- Loose monetary policy: lowering interest rates
- Looser fiscal policy: lowering taxes and increasing government spending
- Sale of foreign exchange reserves on the foreign exchange market and purchasing competing currencies.
What is Currency Devaluation?
Devaluation is the intentional reduction in a country’s currency’s value compared to other money, group of currencies, or currency standard.
- This monetary policy tool is only available to countries that have fixed or partially fixed exchange rates.
- It is the inverse of revaluation, which refers to changing the exchange rate of a currency and is often confused with depreciation.
- Devaluation is the deliberate reduction in the value of a country’s currency.
- The government that issues the currency decides to devalue it.
- Currency depreciation reduces the cost of a country’s exports and can aid in the reduction of trade deficits.
- Depreciation is initiated by a nation’s government and does not result from non-governmental operations.
- One reason a country’s currency may weaken is to address a trade imbalance.
Devaluation reduces a country’s export costs while increasing its global competitiveness while increasing import costs. Domestic consumers are less likely to buy imported goods if they are more expensive, which benefits domestic businesses even more.
Summary:
How do you Stop Currency Devaluation?
Currency Devaluation can be stopped or avoided with the help of various organizations at the international level. This includes the International Monetary Fund (IMF), which has been established to aid in the coordination of foreign exchange policies and trade among countries to avoid currency devaluation by nations and retaliatory devaluations by rival governments.
As exports rise and imports fall, the trade deficit shrinks, resulting in a better balance of payments. In other words, a country that devalues its currency may be able to reduce its deficit as demand for less expensive exports increases.
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