Devaluation is a dirty word. It stinks of failure!

Time: 0040Z
Local Time: 0840
Status: Studying
Location: School (U6-2)

Today's topic also about ER. Its all about Revaluation and mostly Devaluation, and this only apply to Fixed Exchange Rate System. Differ from Floating Exchange Rate where the rate is determined by the market forces of demand and supply either depreciate or appreciate with no government intervention unlike FER, with government intervention to the market, the exchange rate is being control or setting up by policymakers to revalue or devalue it currency at particular point. Say there's one authority, and they set a policy to their currency, and they want their currency to devalue to 1 Pound equal to 1.5 Dollar, not beyond this limit. Initially 1 pound is equivalent to 2 dollar, and suddenly the demand for pound is increase, Increase DD for pound lead to revalue, in order to devalue, the authority need to sells their currency to achieve back 1 pound = 1.5 Dollar, therefore Supply of pound increase, and Supply curve is shifted. If the authority can't support or hold the policy ( 1 Pound = 1.5 Dollar ) , the policy failed.

Why government intervene? why they want to revalue their currency?
With government intervention, the currency is much lower as result of devaluation. Price of export more likely to be cheap and more competitive and price of import is more to become expensive. In order to improve BoT, Both price elasticity of demand of export and import must be elastic. Unemployment also has fallen due to increase in Aggregate Demand (one of the component of AD is [x-m]) as Export Revenue is higher than import spending. There's one theory called Marshall-Lerner Condition, both are economist. It says that if currency devalue, it could give a big positive impact to trade balance aka BoT if the PED of Export and Import is > 1.

This can be defined as: PEDx + PEDm > 1, the higher the total PED, the more effective devaluation is. And to satisfy this, it might be a long run to let PEDx and PEDm more elastic (the more longer the time period, the more elastic the demand is). *need critiction*. In a short run, it will affect BoT to deficit (worsen). My statment above can be seen or prove through J-Curve More resources about devalution please refer to here.

Thanks to Sir V! Credit to him..
Taken From my other blog!