Competitive devaluation
Also called: Currency war · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Competitive devaluation happens when countries deliberately weaken their currencies to make their exports cheaper abroad. The gain comes at trading partners' expense, because their goods become relatively dearer. So partners often retaliate with devaluations of their own. When many countries do this at once, it is called a currency war. Everyone ends up weaker and no one gains a lasting edge. It is a "beggar-thy-neighbour" policy: one country tries to fix its own problems by pushing them onto others.
Example
In the 1930s Great Depression, countries cut their currencies one after another to protect jobs at home. Each round of devaluation invited another, and world trade shrank. In 2010, complaints about countries holding their currencies down to win export markets were widely called the "currency wars".
Don't confuse with
- Devaluation: a single government decision to lower a currency's value under a fixed rate. It becomes "competitive" when the aim is to take trade from partners and the result is a chain of retaliation.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Black market for foreign exchange
- Speculative attack
- Managed floating
- Forex intervention
- Crawling peg
- Currency board
- Impossible trinity