Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
There is a crucial difference between devaluing within a fixed-rate system and floating your currency.

If you devalue in a fixed rate system, you have to defend the new, lower exchange rate, a rate which is prima facie incredible (you just devalued - why should anybody trust you to not do it again). Which means that you have to jack up interest rates almost as high to defend the new exchange rate as you had to to defend the old.

If you float, on the other hand, you are not committing to defending any particular exchange rate. So if people dislike holding your new, lower valued, currency, you can go "too bad, so sad" and keep the interest rate low for the benefit of your domestic industry.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 19th, 2012 at 06:28:34 PM EST
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