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Competitive devaluation

Explain the short-run gain from competitive devaluation, name its costs, and say what its success depends on

Key terms
Competitive devaluation
Competitive devaluation is a deliberate lowering of a currency's value by a government or central bank, aimed at making its exports cheaper than its rivals' goods.
Currency war
A currency war is a run of countries weakening their currencies in turn, each trying to win export sales from the others.

A government can push its currency down through interest rates, intervention or a devaluation

A country may want a weaker currency to help its export industries, or to stimulate aggregate demand and reduce a recession. Its central bank can lower interest rates, which reduces demand for the currency and increases its supply on foreign exchange markets. Or it can trade directly, creating its own currency and using it to buy foreign currencies.

Under a fixed exchange rate the government can announce a lower official rate, which is a devaluation. Either way, the aim of competitive devaluation is to win sales from trading partners.