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Devaluation

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Devaluation is the reduction in value of a currency, relative to all other currencies. In a fixed-rate regime, only a country's central bank can undertake devaluation of its currency. The impact of devaluation is to make exports less expensive to foreign buyers and imports more expensive for domestic buyers. Thus devaluation will shift a country's trade balance, or balance of payments. Sufficient devaluation is presumed to make a country so much more competitive than other countries that competitive devaluation can in effect be considered the export of unemployment. However, following the Asian currency crisis, there is evidence devaluation is not always expansionary. The IMF has as part of its mission the mandate to discourage devaluation for competitive reasons in order to maintain stability of exchange rates. The opposite of devaluation is revaluation.



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