Map of the devaluation of national currencies as a percentage of the US dollar
Map of the devaluation of national currencies as a percentage of the United States dollar for the period from January 1, 2014 to August 24, 2015.
Devaluation (lat. De - decrease; lat. Valeo - matter, cost) - a decrease in the gold content of the monetary unit in the gold standard. In modern conditions, the term is used for situations of official depreciation of the national currency against hard currencies in systems with a fixed exchange rate set by the monetary authorities.
Devaluation is a decrease in the real exchange rate dictated by economic policy (the term is used in the research works of the International Monetary Fund).
Depreciation is seen as a central bank instrument for managing the national currency, the opposite of revaluation.
In a floating exchange rate, there is no direct official designation of the value of the national currency. Therefore, for the situation of depreciation, the term depreciation is used, and for the situation of growth of the currency, the term appreciation is used. The central bank can only use indirect methods (currency interventions) to change the exchange rate. Under these conditions, depreciation or appreciation will not be the result of the adoption of an official document, but the result of changes in the value of the currency under the influence of market mechanisms.
Devaluation and inflation
The term “inflation” is close in meaning to the term “devaluation”, however the former is more often referred to the purchasing power of the national currency in the local commodity market, and the latter is related to the purchasing power in relation to foreign currencies. In meaning, both are characterized by a change in purchasing power. Often, currency devaluation can be one of the causes of domestic inflation. However, foreign currencies are also subject to inflation, so inflation is possible without devaluation. If foreign currencies are subject to deflation, then devaluation without inflation is possible.
Types of devaluation
There are official (open) and hidden devaluations. With an open devaluation, the Central Bank of the country officially declares the devaluation of the national currency, depreciated paper money is withdrawn from circulation, or such money is exchanged for new, stable credit money (but at the rate corresponding to the depreciation of old money, that is, lower). In case of hidden devaluation, the state reduces the real value of the monetary unit in relation to foreign currencies without withdrawing the depreciated money from circulation. Open devaluation causes a drop in commodity prices; a consequence of a hidden devaluation is an increase in commodity prices.
Reasons for devaluation
The reasons for the devaluation of the national currency may be inflation or a deficit in balance of payments. Although devaluation is caused by macroeconomic factors, a direct depreciation of the currency is caused by a decision of the regulatory authorities in the country. Such a decision could be an official decrease in the exchange rate fixed by the country's leadership, refusal to support the exchange rate, refusal to link the exchange rate to the currencies of other countries or currency baskets in order to reduce the country's balance of payments deficit, increase the competitiveness of manufactured goods on the world market, and stimulate domestic production.
The risk of currency devaluation is understood as the risk of a sharp stressful depreciation of the currency relative to other currencies. The ability to assess the risk of devaluation significantly depends on the form in which it occurs. A decline by the country's leadership in a fixed rate can be predicted in advance; natural devaluation caused by the inability of regulators to maintain the exchange rate is difficult to assess. In anticipation of a sharp drop in the exchange rate, investors begin to invest in more tangible media. But, nevertheless, this is an extreme measure.