Effects of Devaluation on Companies in Uk
Effects of devaluation of a sterling pound on business in UK
Introduction
Devaluation is the reduction of a country’s currency compared to that of other countries. It makes the domestic currency less valuable and reduces its power of exchange against foreign currencies and can thus buy a smaller amount of foreign currency (Isard, 1995). This consequently reduces its real value. Devaluation has both negative and positive economic implications (Edwards, 1989). According to Ghosh, Gulde, and Wolf, (2002), the implications are dependent on the exchange rate regime of the country which can either be: 1. Free floating exchange rate where the market forces of demand and supply of currency completely determine its exchange rate. 2. Managed floating exchange rates where the market forces of supply and demand determine the value of currency but there exist some market intervention by the government as part of demand management. 3. Semi-fixed exchange rate where a fluctuation band within which currency can move is set by the government. 4. Fully fixed exchange rate in which a specific exchange rate is set with no room for fluctuation.
Britain’s exchange rate regime
Britain adopts the floating exchange rate. This floating exchange rate is among the monetary policy pivotal feature which helps in implementing measures on inflation and consumer prices in Britain (Gwartney, 2009). Valuation of the Sterling Pound is controlled by the market while the government takes control of economic policies. The central bank has a legal right of using appropriate monetary policies to ensure the inflation rate is not affected by Sterling pound’s exchange rate (Aldcroft, & Catterall, 2001).
The sterling pound enjoys triple A rating. Triple A rating is the highest rating given by various bond agencies such as Fitch Rating, Standard and poor rating among other concerning bonds. A currency triple A rating indicates shows the credit worthiness of the respective
Introduction
Devaluation is the reduction of a country’s currency compared to that of other countries. It makes the domestic currency less valuable and reduces its power of exchange against foreign currencies and can thus buy a smaller amount of foreign currency (Isard, 1995). This consequently reduces its real value. Devaluation has both negative and positive economic implications (Edwards, 1989). According to Ghosh, Gulde, and Wolf, (2002), the implications are dependent on the exchange rate regime of the country which can either be: 1. Free floating exchange rate where the market forces of demand and supply of currency completely determine its exchange rate. 2. Managed floating exchange rates where the market forces of supply and demand determine the value of currency but there exist some market intervention by the government as part of demand management. 3. Semi-fixed exchange rate where a fluctuation band within which currency can move is set by the government. 4. Fully fixed exchange rate in which a specific exchange rate is set with no room for fluctuation.
Britain’s exchange rate regime
Britain adopts the floating exchange rate. This floating exchange rate is among the monetary policy pivotal feature which helps in implementing measures on inflation and consumer prices in Britain (Gwartney, 2009). Valuation of the Sterling Pound is controlled by the market while the government takes control of economic policies. The central bank has a legal right of using appropriate monetary policies to ensure the inflation rate is not affected by Sterling pound’s exchange rate (Aldcroft, & Catterall, 2001).
The sterling pound enjoys triple A rating. Triple A rating is the highest rating given by various bond agencies such as Fitch Rating, Standard and poor rating among other concerning bonds. A currency triple A rating indicates shows the credit worthiness of the respective
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