Devaluation (currency)

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As devaluation ( currency devaluation , devaluation ) is defined as the reduction in the nominal exchange rate of its own currency against foreign currencies in indirect quotation . The opposite is the appreciation .

General

Revaluations and devaluations can only occur between different currencies . There is a single currency within a currency zone, so appreciation or depreciation is not possible. There are appreciations and depreciations, for example, between the euro and the US dollar or the British pound . Devaluation is the term used to describe both the tendency of the domestic currency to drop in the rate of exchange against foreign currencies as a result of market fluctuations, as well as the administrative devaluation caused by economic policy considerations of a state or a central bank .

Within the framework of the exchange rate mechanism , the devaluation tends to lead to a relative increase in the price of imports and a relative reduction in export prices to restore international competitiveness and to balance the balance of payments by increasing currency reserves in the depreciating state.

Revaluations and devaluations have only been known since the system of fixed currency parities , where currency rates were only allowed to fluctuate within a fixed exchange rate range. If the lowest intervention point was reached by a foreign currency , this currency was threatened with a devaluation or the domestic currency with an appreciation. The situation was reversed at the upper intervention point.

history

There were no revaluations or devaluations for pure gold currencies because the automatism of the gold currencies did not allow any change in the gold parity . The International Monetary Fund (IMF) created a system of fixed exchange rates for the first time in July 1944, in which its members agreed administratively fixed US $ currency parities and / or gold parities. The US $ currency parity indicated how many units of a foreign currency corresponded to one US dollar. The parities of the other currencies can be calculated using the gold parities and / or US $ parities. This created a system of fixed exchange rates between the member countries. This made gold a common measure of value for all currencies. In May 1949 the IMF set the first exchange rate parity at 3.33 DM = 1 US $; in September 1949 the IMF parity was already at 4.20 DM due to the devaluation of the DM. In March 1961 it fell due to the first revaluation of the DM to 4.00 DM, the second DM revaluation followed in October 1969 to DM 3.66, a third in December 1969 to DM 3.22.

In October 1968, the constant downward pressure on the US dollar made it necessary for the Deutsche Bundesbank to stop its foreign exchange market interventions . The previous heterogeneous economic development of the western industrialized countries made it impossible to stick to this system of fixed exchange rates because the central banks had to intervene more and more frequently. Strong export nations like Germany tended to be suspected of revaluation, countries with a negative trade balance like the USA were potentially at risk of devaluation. Fixed exchange rates were first eased on September 30, 1969. The internationally agreed adjustment of exchange rate parities in December 1971 ( Smithsonian Agreement ) and the dollar devaluation by 10% in February 1973 were attempts to save the parity system. In a televised address on August 15, 1971, US President Richard M. Nixon unilaterally denounced the IMF's Bretton Woods Agreement . On December 12, 1971 the gold parity was finally abolished, on 17/18. December 1971 an agreement was made on the reorganization of exchange rates through so-called central rates as part of the Smithsonian Agreement . It was a matter of increasing the bandwidths from ± 1% to ± 2.25%.

On March 19, 1973, the European Economic Community began jointly block floating against the US dollar, which replaced the previously applicable fixed exchange rates in favor of freely fluctuating exchange rates. In March 1979, the block floating was transferred to the European Monetary System (EMS). Since then, the parities with the highest and lowest rates have been set over the ECU by means of a currency basket. From March 1979, the core element of the EMS was a system of bilateral exchange rate parities between the members, which were based on the DM as the strongest currency. It was replaced in January 1999 by the introduction of the euro , which is characterized by fixed currency parities for the member currencies. These parities were set by the Finance Ministers on December 31, 1998 on the basis of the ECU parities.

causes

The devaluation takes place on the foreign exchange market in that the rate of the currency falls on the foreign exchange market. Reasons for this can be:

consequences

A contingent by a devaluation of change in net exports over time with a typical J-curve adjustment progress

The devaluation changes international competitiveness as follows:

  • Domestically produced goods are relatively cheaper abroad, and with elastic foreign demand there is an increase in exports.
  • Goods produced abroad are relatively more expensive, with elastic domestic demand, fewer foreign goods are bought, and domestic goods are bought more often instead of foreign goods (import substitution). So the volume of imports is falling.
  • The same amount of imported goods becomes more expensive after a devaluation.

Competitive devaluation

A devaluation that takes place via the unaffected exchange rate mechanism tends to lead to a reduction in balance of payments deficits ( balance of payments mechanism ). However, devaluation can also be an instrument of economic policy, in which case one speaks of competitive devaluation. A competitive devaluation usually takes place through a planned foreign exchange market intervention and / or an expansive monetary policy of the central bank . One unorthodox method of expansionary monetary policy is quantitative easing .

A competitive devaluation is usually initially unpopular among the population, because a typical side effect is an at least short-term decline in the standard of living, as imports and foreign travel become relatively more expensive. A competitive devaluation of one's own currency also leads to a real increase in the value of foreign currency loans ; if the debt level in foreign currency is high, this can lead to a debt crisis. On the other hand, a devaluation typically leads to an increase in export demand ; this causes an economic recovery and a decrease in unemployment. Increasing exports also generate additional income for private households. Experience has shown that part of this additional income is spent on buying goods or services, which creates new income ( export multiplier ). Another goal can be to increase current account surpluses.

Competitive devaluation is a relatively frequently used tool in economic policy. For a single country, the strategy can be extremely successful as long as the trading partners don't fight back. If the trading partner countries also use the means of competitive devaluation, then the devaluations cancel each other out; in principle, no country has a positive or negative effect. However, such a currency war creates uncertainty among companies and investors, which harms international trade and discourages investors. The indirect effect of a currency war is negative for all countries.

Hedging

Exporters and importers who invoice in a foreign currency can completely or partially eliminate their exchange rate risks through hedging transactions . If the importer has a liability in a foreign currency, a devaluation of the domestic currency or an appreciation of the foreign currency would mean for him an increase in the equivalent value of his liabilities, since he would have to raise more foreign currency. He buys foreign currency as a forward contract , whose due date is identical to the maturity of the import commitment. The exporter has a receivable in a foreign currency, so that an appreciation of the domestic currency or a depreciation of the foreign currency would mean a loss of receivables for him . He sells the foreign currency as a forward transaction, the maturity of which is identical to the term of the export claim. If the expected devaluation falls within the period of the hedge, both are credited with the market value agreed before the devaluation and do not suffer any devaluation losses. Both currency forwards eliminate the exchange rate risks in the form of risk reduction . Both achieve an original hedge against devaluation losses if they conclude their export and import transactions in the domestic currency.

Individual evidence

  1. ↑ Gerhard Müller / Josef Löffelholz, Bank-Lexikon: Concise dictionary for banking and savings banks , 1973, Sp. 23
  2. ↑ Helmut Lipfert , Introduction to Monetary Policy , 1973, p. 121 f.
  3. ^ Hauke ​​Rath, Wirtschaft, Geld und Börse in the newspaper , 2000, p. 273
  4. ↑ Bernd Engel / Hans Herber, Economics for Studies and Banking Practice , 1983, p. 252
  5. ^ Ernst Baltensperger / Werner Ehrlicher / Rudolf Richter, Problems of Monetary Policy , 1981, p. 9
  6. ^ Ricarda Kampmann, Johann Walter: Macroeconomics. Oldenbourg Wissenschaftsverlag, 2010, ISBN 978-3-486-59158-3 , p. 225. (online via de Gruyter)
  7. ↑ Olivier Blanchard, Gerhard Illing: Macroeconomics. Pearson Germany, 2009, ISBN 978-3-8273-7363-2 , p. 567.
  8. ^ Bernhard Winkler: The political economy of the European Monetary Union. In: Alan W. Cafruny, Patrick Peters: The Union and the World: The Political Economy of a Common European Foreign Policy. Kluwer Law International, 1998, ISBN 90-411-0500-X , p. 184.
  9. ^ Ricarda Kampmann, Johann Walter: Macroeconomics. Oldenbourg Wissenschaftsverlag, 2010, ISBN 978-3-486-59158-3 , p. 225. (online via de Gruyter)
  10. ↑ Duden Economy from A to Z: Basic knowledge for school and study, work and everyday life. 5th edition. Bibliographisches Institut, Mannheim 2013 (licensed edition Bonn: Federal Agency for Civic Education 2013, keyword export multiplier )
  11. ^ Ricarda Kampmann, Johann Walter: Macroeconomics. Oldenbourg Wissenschaftsverlag, 2010, ISBN 978-3-486-59158-3 , p. 225. (online via de Gruyter)
  12. ^ Henry Thompson: International Economics: Global Markets and Competition. World Scientific Publishing, 2011, ISBN 978-981-4307-02-4 , pp. 393, 394.