What type of policy is devaluing the exchange rate?

Answer 1

In a word, I would describe it as a "free trade", "neoliberal" or "Washington consensus" market policy. It is usually recommended by the IMF and similar multilateral lenders to developing countries, as a way of encouraging export-led growth. Making their currency cheaper makes their goods cheaper for foreign buyers, and therefore more competitive on the world market. The flipside is that it makes foreign currencies, and therefore imported goods from other countries, more expensive.

In theory, a country can benefit greatly from devaluation if it allows them to significantly increase their exports, and if they are able produce enough essential goods domestically instead of importing them. Unfortunately devaluation often backfires. Devaluation is an inflationary policy--imported goods, often including basic necessities, become more expensive, and this generally hurts the poor very hard. The same debt in foreign currency also becomes more expensive in local currency to pay off.

Answer 2

You question is very vague. Are you referring to the US dollar? Are you just asking a theoretical question?

Monetary policy is the policy area that sets the fixed ER, although the ER might be fixed in consultation with lots of other domestic and foreign organizations.

Economists disagree about what is causing the US to depreciate. It could be that foreign investors are losing confidence in the US, and capital inflows -- lending to the US from foreigners -- is slowing.

Or, it could be that US citizens are looking ahead and realizing that their taxes will have to go up to pay for current deficits or that the future exchange rate will be depreciated due to the current deficit. Either way, this also puts downward pressure on the current ER.

Answer 3

That's sort of the answer...

Basically, currency is just like any other commodity (good), in that it's price (the exchange rate) is determined by the amount of currency in circulation (supply), and the strength of demand for it. That would largely be based upon people's faith (both within the country and abroad) in the issuing nation's government (ability to govern and maintain stability) and economy (ability of the holder to obtain a good or service in exchange for the currency).

This really isn't the whole answer, but it's 6 pm on a Friday...

Answer 4

The national debt is what's doing it... along with the trade deficit.

Do you know how governments pay off debt without taxing people for it? They just run the presses and print more money- and that makes all the money that's already out there worth less.

Answer 5

macroeconomic monetary policy