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In most of the scholarly articles we could observe a trend of governments trying to postpone devaluation until some serious crisis hit countries. Furthermore, we also observed that once the crises hit, the costs of devaluating increase enormously.

The Economics of Devaluation

The economics of devaluation, however, can be viewed in the following way. When governments are faced with balance of payments deficits they can chose whether to allow their correction through adjustment policies, or to finance it through borrowing or running down reserves. Which approach to use, adjustment policies or financing, depends whether or not the deficit is temporary; on the relative costs of adjustment; as well as on the discount rate (how much will the government discount future sacrifices of consumption, if it’s done through financing). If the deficit is considered to be temporary; the costs of adjustment are high; the cost of financing is low; if the social discount rate is high, governments generally tend to avoid devaluating as a short-term adjustment process. Again, which approach should be used? In most of the cases, governments believe that balance of payments deficit will correct itself through time, hoping that exports will increase. Furthermore, if a country has the option of financing it, it will try to postpone devaluation as much as possible.

However, financing is not always at their disposal. For example, countries with low international reserves and a limited access to capital markets are very likely to adopt devaluation measures early enough in the process, given that they might find themselves left with the option of short term adjustment only. To exacerbate the problem further, creditors may be reluctant to lend to countries that are not fighting hard to eliminate their balance of payments deficits. If this is the only option left to adjust balance of payments crises, devaluation should be considered as both, effective and efficient. Effective in the sense that it should achieve the expected results, that being - reduced balance of payments deficit, and efficient in minimizing harm to other policy objectives, including low inflation, low unemployment, and economic growth.

The question as to what will happen after devaluation, can be explained by the Marshal-Lerner-Robinson Condition (hereafter, MLR), which uses an elasticity approach to devaluation. The MLR condition is named after its founders Alfred Marshal, Abba Lerner, and Joan Robinson, and tries to answer the following question: When does a real devaluation (in the case of fixed exchange rates) or real depreciation (in the case of floating exchange rates) of the currency improve the current account balance of a country?

To simplify it, let’s assume that trade, investments, and transfers are zero, implying that the trade account equals the current account. According to the simples本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。