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devaluation

Reduction in the exchange value of a country's monetary unit in terms of gold, silver, or foreign currency. By decreasing the price of the home country's exports abroad and increasing the price of imports in the home country, devaluation encourages the home country's export sales and discourages expenditures on imports, thus improving its balance of payments.

For more information on devaluation, visit Britannica.com.

A deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country's government (i.e central bank) can alter the official value of the currency. Contrast to "revaluation".

Investopedia Says:
There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit.

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Downward adjustment by monetary authorities in the official exchange rate of a nation's currency in relation to a Key Currency such as the U.S. Dollar or an established monetary standard such as gold. Devaluation occurs when a government increases the amount of its currency it is willing to exchange with other currencies at current exchange rates. Contrast with Depreciation. See also Revaluation.

Devaluation, a downward adjustment of the price of a currency in terms of other currencies, in a system in which each currency has a gold par value. The downward adjustment may be achieved through a devaluation of one currency, an upward revaluation of other currencies, or a combination of the two. The U.S. dollar has been devalued several times since the early nineteenth century. The gold content of the U.S. dollar, established at 24.75 grains (2 April 1792), was reduced to 23.2 grains (29 June 1834) and then raised to 23.22 grains (18 January 1837). The 1834 devaluation was intended to attract gold from Europe and thereby encourage a shift away from bank notes in domestic transactions. A century later, when the gold content of the dollar was reduced to 13.71 grains (31 January 1934), the aim was to raise dollar prices of U.S. farm products, which had a world market, by reducing the foreign-exchange value of the dollar. Under President Richard M. Nixon, the gold content of the dollar was reduced to 12.63 grains (31 March 1972) and then reduced another 10 percent to 11.368 grains (12 February 1973). For each dollar weight in gold, there is a corresponding price of gold per fine troy ounce of 480 grains (480/11.368 ≅ $42.22). Since convertibility of the dollar into gold was suspended 15 August 1971, the devaluations in terms of gold were pro forma only. The new gold prices were merely devices for measuring the downward adjustment of the U.S. dollar relative to other currencies set by the Smithsonian Accord (17–18 December 1971) to help correct a deficit in the U.S. international payments balance. The Reagan Administration briefly adopted devaluation policies in the 1980s, but abandoned them when they failed to reduce the trade deficit.

Bibliography

Edwards, Sebastian. Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era. Cambridge, Mass.: National Bureau of Economic Research, 1992.

Friedman, Milton. A Monetary History of the United States, 1867–1960. Princeton N.J.: Princeton University Press, 1963.

North, Douglass C. Structure and Change in Economic History. New York: Norton, 1981.

Samuelson, Robert J. The Good Life and Its Discontents: America in the Age of Entitlement, 1945–1995. New York: Times Books, 1995.

—Anna J. Schwartz/A. G.

devaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. Although devaluation occurs in terms of all other currencies, it is best illustrated in the case of only one other currency. For example, if the United States is losing money in its trade with France, a decision may be made to devalue the U.S. dollar by 10%. Whereas previously one dollar may have been worth about 5.5 francs, a 10% devaluation causes it to be worth only about 5 francs. Such a move causes French products to become more expensive for Americans and U.S. products to become cheaper for Frenchmen. An ounce of French cologne that previously cost 55 francs in France and 10 dollars in the United States may still sell for 55 francs in France but will now cost 11 dollars in the United States. The net result of such a devaluation is that U.S. exports tend to increase and imports tend to decrease, thus helping to reverse the balance of payments deficit.

A policy undertaken by a nation to reduce the value of its national currency either in relation to gold or in relation to the currencies of other nations.

Foreign exchange
Exchange rates Currency band Exchange rate Exchange rate regime Fixed exchange rate Floating exchange rate Linked exchange rate
Markets Foreign exchange market Futures exchange Retail forex
Products Currency Currency future Non-deliverable forward Forex swap Currency swap Foreign exchange option
See also Bureau de change / currency exchange (office)

Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.

Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.

Historical usage

Devaluation is most often used in situations where a currency has a defined value relative to the baseline. Historically, early currencies were typically coins struck from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.

Later, paper currencies were issued, and governments decreed them to be redeemable for gold or silver (a gold standard). Again, a government short on gold or silver might devalue by abruptly decreeing a reduction in the currency's redemption value, reducing the value of everyone's holdings.

Devaluation in modern economies

Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of aggregate supply and aggregate demand within the macroeconomy. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld present a theoretical model in which they state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate) (Krugman, Paul and Maurice Obstfeld. International Economics (2000), Chapter 17 [Appendix II]). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country is low on foreign reserves well after the real exchange rate has fallen. In these circumstances, the currency value will fall very far very rapidly. This is what occurred during the 1994 economic crisis in Mexico.

Generally, a steady process of inflation is not considered a devaluation, although if a currency has a high level of inflation, its value will naturally fall against gold or foreign currencies. Especially where a country deliberately prints money (a usual cause of hyperinflation) to cover a persistent budget deficit without borrowing, this may be considered a devaluation.

In some cases, a country may revalue its currency higher (the opposite of devaluation) in response to positive economic conditions, to lower inflation, or to please investors and trading partners. This would imply that existing currency increased in value, as opposed to the case with denomination where a country issues a new currency to replace an old currency that had declined excessively in value (such as Turkey and Romania in 2005, Argentina in 2002, Russia in 1998, or Germany in 1923).

References

Economist.com | Economics A-Z

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Dansk (Danish)
n. - devaluering

Nederlands (Dutch)
devaluatie, waardevermindering (van geld)

Français (French)
n. - dévaluation

Deutsch (German)
n. - Abwertung, Devalvation

Ελληνική (Greek)
n. - (οικον.) υποτίμηση (νομίσματος)

Italiano (Italian)
svalutazione, perdita di valore

Português (Portuguese)
n. - desvalorização (f)

Русский (Russian)
обесценивание, девальвация

Español (Spanish)
n. - devaluación

Svenska (Swedish)
n. - devalvering

中文（简体）(Chinese (Simplified))
贬值

中文（繁體）(Chinese (Traditional))
n. - 貶值

한국어 (Korean)
n. - 평가 절하, 신분의 저하

日本語 (Japanese)
n. - 平価切下げ, 価値の引下げ

العربيه (Arabic)
‏(الاسم) تخفيض قيمه العمله مقابل العملات الأخرى أو الذهب, انخفاض قيمه شئ‏

עברית (Hebrew)
n. - ‮הורדת ערך המטבע, פיחות‬

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