Acta Economica (Feb 2011)
MANIFESTATIONS AND EFFECTS OF COMPETITIVE DEVALUATION IN CONDITIONS OF CRISIS
Abstract
Depletion of the positive effects of fiscal policy and monetary policy in the area of referent interest rate reduction, exchange rate policy has become an instrument through which a country could find a chance to faster come out of the current economic crisis. Competitive devaluation of domestic currency increases the price competitiveness of domestic products and consequently increases the demand for domestic products in the foreign markets. However, if one country takes an action of competitive devaluation, other countries, threatened by such action, are expected to take the countermeasures, which can ultimately lead to a currency war. In this paper we examine the monetary policy of the United States, China and the European Еconomic and Monetary Union. Our goal is to identify the existence, manifestations and effects of competitive devaluations on the international monetary system. The results indicate that the U.S. uses economic unfounded arguments to put pressures on China to revalue its currency, as well as the measures aimed at depreciating dollar. Also, analysis showed that the slow reaction of the Eurozone countries in the settlement of the Greek and Irish debt crisis significantly contributed to the weakening of euro, which has a positive effect on exports from the Eurozone, especially from Germany. Because of the negative consequences that competitive devaluations could have on the stability of international monetary system, the G20 called for restraint from competitive devaluations and the coordination of macroeconomic policies, which could present an opportunity for the international monetary system reform.
