Post by hasan77 on Feb 15, 2024 0:51:40 GMT -5
Surely you've heard of currency wars or competitive devaluation , but do you know what it means and how it works? In this post we answer these questions. What is a currency war? Currency war (also known as competitive devaluation) is an economic event that occurs when one currency depreciates, that is, loses value against others . It usually occurs when a country tries to preserve its capital at a lower exchange rate to increase its competitiveness in international trade and increase the volume of exports. The purpose of this is usually to deteriorate relations with the country with which it competes. There are different mechanisms that serve to achieve this.
They depend on the type of exchange rate regime that the country has: Regimes with a flexible exchange rate. There is no direct intervention in the market, since the cost of the currency is determined by supply and demand. In this way, depreciation occurs by reducing the interest rate. Fixed exchange Papua New Guinea Email List rate regimes. Central banks are responsible for determining the cost of the currency, so they are the ones who carry out the devaluation through different procedures. Regimes with a mixed exchange rate. The central banks of the different currencies have the power to intervene in the market. This generates some pressure on the price of the local currency and allows its value to decrease in relation to other foreign currencies.
What impact do they have on the global economy? The currency war can have a major impact on the economy of both the country and the global economy. At the state level, currency devaluation can make the national currency more affordable to foreigners, which would stimulate exports and economic growth. The negative part is that national consumers could see an increase in the price of imported products , since, with the devaluation, their price is higher. At a global level, the currency war could cause a spiral of devaluations, in a kind of domino effect. This would lead to economic instability and the global financial system could become compromised.
They depend on the type of exchange rate regime that the country has: Regimes with a flexible exchange rate. There is no direct intervention in the market, since the cost of the currency is determined by supply and demand. In this way, depreciation occurs by reducing the interest rate. Fixed exchange Papua New Guinea Email List rate regimes. Central banks are responsible for determining the cost of the currency, so they are the ones who carry out the devaluation through different procedures. Regimes with a mixed exchange rate. The central banks of the different currencies have the power to intervene in the market. This generates some pressure on the price of the local currency and allows its value to decrease in relation to other foreign currencies.
What impact do they have on the global economy? The currency war can have a major impact on the economy of both the country and the global economy. At the state level, currency devaluation can make the national currency more affordable to foreigners, which would stimulate exports and economic growth. The negative part is that national consumers could see an increase in the price of imported products , since, with the devaluation, their price is higher. At a global level, the currency war could cause a spiral of devaluations, in a kind of domino effect. This would lead to economic instability and the global financial system could become compromised.