ABSTRACT
Currency depreciation is surrounded by various controversies and myths. It is clear that weakening a currency, which reduces wages as expressed in trading partners’ currencies, automatically improves international competitiveness. The effect might not be lasting, but with appropriate macroeconomic policies it may last for many years, making economic growth possible. Some believe that the ability to take refuge in devaluation is harmful, as it reduces the motivation to undertake difficult structural reforms, but the growth it drives can balance out the recessionary effect of structural reforms, and thus soften their economic and social costs. It’s not a coincidence that successful adjustment programs are typically associated with currency depreciation. Exchange-rate adjustments aren’t necessarily beggar-thy-neighbour policies; a change that improves the competitiveness of the economy can allow for an increase in domestic demand, while keeping the trade balance at an acceptable level.
