What are (or are there) alternatives to currency devaluation? Phrased differently, what are the mechanisms that a country could use to make its products more competitive and to boost exports, when:

  • it is under a currency board?

  • it has an external1 central bank ?

1. When the local central bank is not allowed to print its own money. For example in the Eurozone , the capital stock of the European Central Bank is owned by the local central banks of all 28 EU member states, however the ECB alone administers monetary policy.

  • $\begingroup$ Why would a country have a currency board if it did not have a Central Bank for its own currency? $\endgroup$
    – 410 gone
    Dec 26 '15 at 21:53
  • $\begingroup$ @EnergyNumbers don't misunderstand me, I realize that all the countries have central banks, just the ones with currency board doesn't have the ability to print money of their own. Effectively the central bank behaviour is determined by the currency board $\endgroup$
    – Ziezi
    Dec 26 '15 at 22:03

The only alternative is what is often called "internal devaluation". This basically means reducing the actual (domestic) prices of goods in a country.

This is what is often called as increased "competitiveness". It is most often achieved through cutting wages or slowing down wage growth. This is because wages are most often a huge cost factor and the price of capital (which is often bought internationally) is harder to reduce just like that. However there is also the phenomenon known as "downward nominal rigidity", which means people don't accept lower nominal wages, so it's very difficult to lower wages. Much harder than increasing them. In fact, in practice, it's easier to increase inflation to reduce real wages than actually reducing the number printed on your check at the end of the month. However in this case, we want deflation (reduction in prices) to boost exports, so the whole matter gets more complicated.

Technically a devaluation only makes all your domestic goods cheaper abroad. This can also be achieved by just reducing your prices of course. However, as we saw, this is difficult. Also there is a coordination problem, as each industry would have to adjust (thousands of prices must adjust) for the same effect as the exchange rate adjusting (one price adjusts).

Milton Friedman used to compare this to daylight savings. We could all just agree to push all our appointments and activities by an hour for some time, which is hard (this would be internal devaluation). Or just change the time for the same effect (exchange rate devaluation).

A surge in quality is technically also an alternative, but not possible always and especially not short-term.

  • $\begingroup$ Nice answer! I don't know if correctly, but I'm recognizing a slight similarity between "internal devaluation" and the EU austerity measures strategy. $\endgroup$
    – Ziezi
    Dec 26 '15 at 23:01
  • 1
    $\begingroup$ Thanks. You are absolutely right to recognize this similarity. $\endgroup$
    – BB King
    Dec 26 '15 at 23:49
  • $\begingroup$ absolutely, I'm just waiting for, what seems to be the SO generally established period of one-two days to pass before accepting $\endgroup$
    – Ziezi
    Dec 27 '15 at 20:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.