Don’t Fall in Love with Parity: Understanding Exchange Rate Depreciation

Abdul Jalil

Abstract


Key Takeaways from Global Research  Exchange rate is like
temperature in a human body: It merely reflects underlying weaknesses.
Like the human body artificially holding the temperature down for long
periods without addressing the causes is likely to lead to grievous
consequences.  There is no such thing as an active devaluation policy
for boosting exports.  Holding the exchange rate at an artificially
appreciated rate is only possible through reserve loss. These losses
cannot be incurred over the long run as reserves are finite and market
participants know that reserves can be attacked to their advantage. 
Bolstering the exchange rate through exchange and import controls serves
only to disrupt supply chains and eventually weaken the domestic
economy. At best it is a short-run painful solution.

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DOI: https://doi.org/10.30541/v60i3pp.359-365

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