Impact of Currency Devaluation on Economy: A Systematic Review
Abstract
Currency devaluation is often administered by a country's central bank as a monetary policy tool, and such practice has far-reaching implications for a nation's economy. In this paper, we conducted a systematic review of literature using the PRISMA method to assess the impact of currency devaluations on two key macroeconomic variables - Gross Domestic Product (GDP) and Export Competitiveness (EC).We also focused on the question whether policymakers in Bangladesh should use currency devaluation to boost production and exports. Along with other sources, a total of 39 peer-reviewed research publications from 2 research databases were eventually included in the review. Our findings suggest that although currency devaluation can positively influence GDP and fairly promote growth of local exports to some extent, such effects are generally short term in nature. Moreover, a significant number of devaluation attempts had additional, often overlooked but crucial implications. Moreover, devaluation often ensued negative consequences, such as decreased national exports and negative growth of GDP. After analyzing our findings, we recommend the following measures to successfully administer currency devaluation-
- Profound degree of initial devaluation and further incremental, marginal devaluation
- Additional government/economic policies to support the devaluation effort
- Implementing sector specific policy solutions,rather than implementing a uniform devaluation policy on the entire export portfolio of a nation..
Keywords: Currency Devaluation, Export Competitiveness, GDP
