devaluation

Devaluation is the deliberate downward adjustment of a country’s official exchange rate relative to other currencies. It is most common under fixed or semi-fixed exchange-rate regimes, where authorities set a target for the currency and officially lower it. By contrast, depreciation refers to a fall in a currency’s value driven by market forces in a flexible-rate regime, without an announced policy change.

Mechanisms and policy context: Devaluation is carried out by the central bank or government by lowering the stated rate, sometimes as part of stabilization or structural-adjustment programs. It can accompany monetary and fiscal measures, changes in interest rates, or temporary capital controls. In regimes with no fixed peg or currency unions, devaluation is less explicit or feasible and adjustments may occur through other channels such as re-pricing in financial markets.

Economic effects: A devaluation can improve a country’s external competitiveness by making exports cheaper for foreigners and imports more expensive for domestic buyers. In the short term it can help reduce trade deficits and support output in tradable sectors, but it often raises domestic inflation through higher import prices. The overall impact on debt depends on the currency denomination of obligations and on how inflation and interest rates interact with growth. Expectations and policy credibility strongly influence the outcome.

Real and nominal aspects: Nominal devaluation refers to the lower stated exchange rate. Real devaluation occurs when the real exchange rate falls after accounting for inflation, potentially improving competitiveness even if the nominal rate moves little. Fixed regimes are most associated with official devaluations; flexible regimes experience devaluations mainly through market re-pricing or policy shifts.