Devaluation and Depreciation

A devaluation or depreciation should work in the opposite direction, improving the trade balance thanks to soaring exports and falling imports.

If, however, imports have an elasticity to price less than 1, their values in local currency will grow instead of falling.

"International comparisons of current values converted to a common currency are "distorted" by wide exchange rate fluctuations."

Hosting different industries, regions usually exhibit a differenciated degree of international openness: exchange rate fluctuations will have a uneven impact on them. Similarly, the number of job places and the working conditions may be influenced by the degree of international competition and exchange rates levels.

Exchange rate influences also the external purchasing power of residents abroad, for example in term of purchasing real estate and other assets (e.g. firm equity as a foreign direct investment), so by different channels, also the balance of payments.

Exchange rate devaluation or depreciation give rise to inflationary pressures: imported good become more expensive both to the direct consumer and to domestic producer using them for further processing.

Symmetrically, the central bank may use a fixed exchange rate as a nominal anchor for the economy to keep inflation under control, compelling domestic producer to face tougher competition as soon as they decide to increase prices or accept to pay higher wages.