Negative Consequences of Smooth Devaluation

BLINOV, Sergey (2016): Negative Consequences of Smooth Devaluation.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary Policy, Central Banking, Business Cycles, International Finance, Foreign Exchange
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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