Eli5: What does devaluation of a currency mean? How does deliberate devaluation helps a country economically?
In: Economics
Makes it easier for a country’s producers to export because goods produced domestically are cheaper in foreign currency terms.
Many countries have a floating exchange rates. The central bank or government may “declare” some kind of desired exchange rate and can intervene (buy and sell currency) in the market to obtain that exchange rate. Devaluation, in one sense, means that the government will no longer intervene in the market when the currency weakens.
Fewer countries have pegged exchange rates. A pegged rate means that the government will promise to exchange local currency for foreign currency at a fixed exchange rate. In this case, devaluation is simply adjusting this promised rate.
There are other policies that a government can take to devalue their currency indirectly; the most common ones being to decrease the interest rate and/or increase the money supply.
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