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oreign trade can encourage devaluation to kick in and strengthen the current account. Additionally, although devaluation produces inflation, this can be mitigated by proper monetary and fiscal policies. However, many studies have concluded that there are large political motivations behind delays in devaluations. The following table shows some countries that have devalued in the past, and what an impact it had on their GDP.

 

Three separate cases of devaluation events are briefly elaborated below to demonstrate the relevance of the key decision influencing factors discussed earlier on the paper. The case studies review Paul Krugman’s The Return of Depression Economics and the Crisis of 2008.

 

The ERM Crises of 1992-93

 

Faced with high unemployment rates due to insufficient demand and the pressure to engage in expansionary policies even though the country could not do so due to fixed exchange rate, the United Kingdom was forced into problems that fueled currency crisis. Basically, there was a tradeoff between fighting unemployment on the one hand, and the political costs leaving the Exchange Rate Mechanism on the other.

 

The unemployment was triggered by the Deuche Mark being a sort of “single” currency of the European Monetary System. Germany, at that time, engaged in heavy expenditures to improve the Eastern part of the Land and thus the Central Bank had to tighten the monetary policy. This obliged other countries to adopt the same policies as they were pegging their currency to the Mark. As all the ingredients for a crisis were present, there was a need for a good “chef” like George Soros to do the specialty. The speculative attacks were launched hoping for a devaluation of the Sterling and making profits out of it. Paul Krugman, however, thinks that “It remains unclear, however, how important a role his actions actually played; it is arguable that the fundamental reasons for the crisis would have set it off even without any action on Soros’s part. A guess might be that he advanced the date of the crisis by only a few weeks or months.” (Krugman, 1999) The UK Government at the time hoped that they would be able to persuade the German Government to modify the tightening policy and relieve the interest rates. Moreover, there was not enough pressure from the exporters to start the devaluation gradually early on. Devaluation was seen as a sigh of weakness even when they were faced with plunging reserves, high interest rates, increasing unemployment, and low economic growth.

 

Even though, the Central Bank of Britain had in disposal substantial reserves and also was able draw credit lines from Germany, the intervention was offset by engaging in sterilization activity to avoid the reduction in the monetary base, thus making the whole process unsuccessful.

 

Finally, the crisis that led the UK Government to drop out of the peg made the economy o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。