Definition and Overview
Revaluation is a deliberate increase in the value of a country’s currency in the context of a fixed exchange rate system. Unlike market-driven currency fluctuations, revaluation decisions are typically politically motivated and are made by a country’s central bank or government. This process contrasts with devaluation, which constitutes a decrease in the currency’s value.
Fixed Exchange Rate System
In a fixed exchange rate system, a country’s currency value is pegged to another currency (often the US dollar) or a basket of currencies. The government’s role is to maintain the pegged rate through interventions, primarily buying or selling currencies on the foreign exchange market.
Mathematical Representation
If the initial exchange rate is \( 1 \text{ unit of foreign currency} = X \text{ units of domestic currency} \), post-revaluation, the exchange rate changes to \( 1 \text{ unit of foreign currency} = Y \text{ units of domestic currency} \) where \( Y < X \).
Types of Revaluation
- Direct Revaluation: An explicit increase in the currency’s value announced by the government.
- Indirect Revaluation: Occurs as a result of policy changes that enhance the currency’s value, such as economic reforms or stabilization measures.
Economic Implications
- Imports and Exports: Higher currency value makes imports cheaper and exports more expensive, potentially leading to trade deficits.
- Foreign Investment: A stronger currency may attract or deter foreign investment based on investor perceptions.
- Inflation Control: Revaluation can help control inflation by making imported goods cheaper.
Historical Context
Historically, revaluation has been employed by various countries to stabilize economies, control inflation, or correct trade imbalances. For example, Germany’s Deutsche Mark was revalued multiple times post-World War II to reflect its strengthening economy.
Examples
Revaluation in Practice
Consider the Swiss National Bank (SNB) abandoning its fixed exchange rate peg of 1.20 Swiss Francs to the Euro in January 2015. The Franc revalued sharply, demonstrating the profound economic impact such decisions can have.
Graphical Example
Special Considerations
Political Impact
- Political Stability: Revaluation decisions are often politically sensitive and can lead to significant economic and political fallout.
- International Relations: Such moves can affect bilateral trade relations and negotiations.
Related Terms
- Appreciation: A natural increase in the currency’s value due to market forces.
- Devaluation: Deliberate reduction in the currency’s value under a fixed exchange rate.
- Floating Exchange Rate: A currency whose value is determined by market forces rather than government controls.
FAQs
What is the primary reason for revaluation?
How does revaluation differ from appreciation?
What are the risks associated with revaluation?
References
- Krugman, P., & Obstfeld, M. (2009). International Economics: Theory and Policy. Addison-Wesley.
- Jeffrey, F. (2016). Macroeconomic Policy: Demystifying the Art of Politics. Palgrave Macmillan.
Summary
Revaluation is an economically and politically significant process wherein a country’s government elects to increase the value of its currency under a fixed exchange rate system. This decision, often aimed at controlling inflation or correcting trade deficits, can have far-reaching implications for imports, exports, and foreign investment, distinguishing it sharply from market-driven currency appreciation.
