Devaluation

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  • The deliberate reduction of the par (pegged) value exchange rate of a currency by a nation's monetary authorities. In the fixed exchange rate regime, the monetary authorities strive to keep the exchange rate virtually fixed or pegged even if the preferred pegged rate differs from the market rate.

    During the interregnum of the world wars, nations devalued their currencies to have a competitive edge in the global economy. This practice became known as “competitive devaluation.” International trade and finance was characterized by volatile and chaotic conditions, for which more formal rules, payment arrange ments, and relative foreign exchange stability became more desirable. The International Monetary Fund (IMF) was created to foster exchange rate stability, increased flow of trade, and balance-of-payments equilibrium.

    In the contemporary international financial system, ...

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