Effects of a one-time devaluation
Monetary Policy. Devaluation provides both opportunities and problems for governments. One effect of a one-time devaluation is to allow the central bank to replenish its foreign exchange reserves. Devaluation often happens when the fixed rate is no longer tenable. However a one-time devaluation may trigger speculation among the foreign exchange market participant. When this happens, the initial devaluation may not increase its foreign exchange reserves. This is due to a myriad of factors.
These expected conditions will trigger unprecedented speculation. Before the expansion of the monetary policy, speculator will buy and hold foreign currency and when the local currency depreciates they will offload the foreign currency at a profit (Henderson, 2008).. Anticipation of an expanded policy will also trigger unprecedented foreign trade. Importers will import more to catch form the expected increase in import price. Local exporters will boost their production in order to catch from expected increased export.
Henderson, D (2008). Greenspan’s monetary policy in retrospect. Washington, D.C. Cato Institute.
Willman, A. (1989). Devaluation expectations and speculative attacks on the currency. The Scandinivian Journal of Economics Vol. 91(1), 97-116.