Negative Consequences of Smooth Devaluation

Sergey Blinov

MPRA Paper from University Library of Munich, Germany

Abstract: In 2015, many countries had to deal with the weakening of their currencies. Issues regarding exchange rate management by the Central Banks have again become the focal point of heated debate. This article compares two approaches to devaluation of local currency under the pressure of external circumstances: smooth devaluation and swift or instantaneous devaluation (drastic, stepped-up). Negative consequences of the «smooth» weakening of the exchange rate are shown, including the example of George Soros' famous attack on the British pound in 1992. Using «only» £5 bn. then, Soros managed to break the resistance of the Bank of England, which ended up investing £15 bn. to fight him. The ideas of Robert Shiller, the Nobel Laureate, have been reviewed which allow this phenomenon to be explained. Recommendations are given regarding a more rational way of managing exchange rate using the example of actions taken by the Bank of Kazakhstan in February 2014.

Keywords: Monetary Policy; Central Banking; Business Cycles; International Finance; Foreign Exchange (search for similar items in EconPapers)
JEL-codes: E30 E52 E58 E65 F30 F31 (search for similar items in EconPapers)
Date: 2016-03-23
New Economics Papers: this item is included in nep-cis, nep-cwa and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:70292

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