Topics: Inflation, Currency, Bretton Woods system Pages: 2 (463 words) Published: September 29, 2013
Marta Sanz

Devaluation essay

Devaluation, in economics, is the official act of reducing the exchange rate at which one currency is exchanged for another in international currency markets. A government may choose to devalue its currency when a chronic imbalance exists in its balance of trade or overall balance of payments. The majority of the countries in the world have devaluated their currency at one time or the other, with a view to achieving certain economic objectives. Since Chavez was elected president in 1998, Venezuela has faced major financial crisis and five consequent devaluations of the Bolivar. There has been much debate in Venezuela over the cause and likely consequences of the latest currency devaluation, while the concrete political and economic impact remains to be seen. The Venezuelan government’s decision to devalue the Bolivar by 32%, from 4.3 to 6.3 Bolivars to the dollar, was a measure seen as inevitable after the Bolivar fell to under a quarter of its official value on the black market. The devaluation can help narrow the budget deficit by increasing the amount of Bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation. The devaluation of currency and exchange has led the Venezuelan economy to have overly high inflation. This devaluation has caused higher consumer inflation on goods thus affecting the total spending on imported goods. The government’s creation of two additional bolivars for each dollar received is creating money, no different from creating money without the devaluation. The main difference is that, in addition to any inflationary impact of creating more money, the devaluation also adds to inflation by raising the price of imported goods. The country is also experiencing a shortage of U.S dollars, which is making it hard for the country to pay for imports. The need for a large devaluation reflects the large macro imbalances that have been...
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