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

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