Definition Competitive Devaluation
When a country tries to devalue its currency to increase its international competitiveness. A devaluation in the exchange rates makes the foreign price of exports lower, and imports become more expensive.
Therefore, a devaluation increases the volume of exports and reduces import demand. This devaluation should lead to an increase in domestic demand and economic growth.
However, if one country devalues, others will see an appreciation in their exchange rate, making their exports more expensive. Therefore, this encourages other countries to also devalue to retain their competitiveness.
In a global recession, with low economic growth, several countries may be trying to devalue to improve competitiveness. Devaluation may lead to only a temporary increases in the competitiveness of exports.
Devaluation can often lead to inflation which reduces long term gains in competitiveness.
- Competitive devaluation and currency wars - Is it harmful or beneficial to devalue during a global recession?
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