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Devaluation to Correct Competitiveness Loss in a Fixed Exchange Rate Regime
A country with a fixed exchange rate that experiences higher domestic inflation than its anchor country will suffer a progressive loss of competitiveness. This can lead to negative economic consequences like factory closures and rising unemployment. As a policy response, the government can temporarily abandon the peg, regain control of its monetary policy to allow the currency to depreciate, and then re-fix the exchange rate at a new, more competitive level. The long-term success of this strategy is contingent on addressing the root causes of the initial inflation problem.
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Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Modeling Fixed Exchange Rates with a Constant Nominal Rate
Countries Without a National Currency
Common Currency Area as a Fixed Exchange Rate Regime
De-pegging Risk as the Key Difference Between Fixed Exchange Rates and Common Currencies
Devaluation to Correct Competitiveness Loss in a Fixed Exchange Rate Regime
Inflation Convergence in Fixed Exchange Rate Systems
Transfer of Monetary Policy Control in a Fixed Exchange Rate Regime
Prevalence of Pegging to the U.S. Dollar
Zero Expected Depreciation in a Credibly Fixed Exchange Rate Regime
Classification of 'Fix' Economies
Example of an Effectively Fixed Exchange Rate: Danish Kroner vs. Euro
Analyzing a Currency Peg Decision
A country chooses to implement a fixed exchange rate regime, pegging its currency to that of a major economic partner. Which of the following is the most direct and significant consequence of this policy decision for the country's ability to manage its own economy?
Competitiveness and Policy Options in a Fixed Exchange Rate System
Match each specific currency arrangement with the description that best characterizes its relationship to a fixed exchange rate regime.
Country A has a fixed exchange rate, pegging its currency to the currency of its main trading partner, Country B. For several years, Country A's domestic inflation rate has been consistently higher than Country B's. If this situation continues and the fixed nominal exchange rate is maintained, what is the most likely consequence for Country A's economy?
In a country with a credibly fixed exchange rate, the central bank can lower its domestic interest rate significantly below the anchor country's interest rate to stimulate the economy, without causing major capital outflows.
Central Bank Intervention to Defend a Currency Peg
Defending a Currency Peg
A country maintains a fixed exchange rate by pegging its currency to that of a major trading partner. Imagine this country begins to experience a period of domestic inflation that is consistently higher than its partner's. Arrange the following economic events and policy responses into the most likely chronological sequence.
A small developing country with a history of high and volatile inflation decides to implement a fixed exchange rate regime, pegging its currency to that of a large, economically stable neighboring country. What is the primary economic stability benefit this policy is designed to achieve?
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Economic Policy for Competitiveness
A country maintains a fixed exchange rate with its primary trading partner but experiences a persistently higher rate of domestic price increases than its partner. Which statement best analyzes the resulting economic pressure and the logic behind a potential policy response?
A country has committed to keeping its currency's value stable against a major trading partner's currency. However, for several years, prices within this country have been rising much faster than in the partner country. Arrange the following events in the logical sequence that would typically unfold, from the initial problem to a policy action and its immediate outcome.
Evaluating Devaluation as a Policy Tool
Long-Term Efficacy of Devaluation
A country has its currency value tied to that of a major trading partner. Match each economic condition or policy action with its most direct consequence.
A government that successfully implements a one-time currency devaluation to offset a loss of competitiveness caused by high domestic prices has permanently solved its competitiveness problem.
When a country with a currency pegged to another nation's experiences prolonged periods of higher domestic price increases, its goods become more expensive internationally. To restore its economic competitiveness, the government might implement a policy of ______, which involves officially lowering the value of its currency relative to the peg.
A country commits to maintaining a fixed value for its currency against the currency of its main trading partner. For several years, the prices of goods and services within this country consistently rise at a much faster rate than in the partner country. If the government takes no action to change its currency policy, what is the most likely outcome for its domestic economy?
A country maintains a fixed exchange rate with its main trading partner. For several years, its domestic prices have risen faster than its partner's, causing its exports to become uncompetitive and leading to a trade deficit. The government is considering an official downward adjustment of its currency's fixed value to restore competitiveness. However, the country also has a substantial amount of government debt denominated in the trading partner's currency. Which of the following statements presents the most critical evaluation of the proposed currency adjustment in this specific context?