An Analysis of Currency Devaluation in Developing Countries 1
Currency devaluation is one of the most dramatic – even traumatic – measures of economic policy that a government may undertake. The point can be made geometrically in terms of demand elasticities, indicating whether the balance improves or deteriorates in domestic and foreign currency. A similar problem arises for net creditors when the value of their foreign claims is reduced in terms of local currency by devaluation abroad or revaluation of the home currency. The objective should be to maximise net returns on exporting, and in these circumstances some lowering of export prices in terms of foreign currency will be desirable to stimulate foreign purchases. There are many questions that one can ask about the consequences of devaluation and its associated package of policies, which may have profound effects upon the allocation of resources, growth, and the distribution of income in developing economies.