A fixed exchange rate regime forces member countries to resort to internal devaluation

Evidence

A country that pegs its own currency to another currency cannot pursue an autonomous monetary policy. The latter must be aimed at maintaining the fixed parity, to the detriment of other economic priorities, such as increase in production and employment. The evolution of the parity of this currency vis-à-vis other currencies, in particular those of competing countries, will be dictated by that of the anchor currency. With a fixed exchange rate, the exchange rate cannot be used to cushion the impact of economic shocks or to improve the price competitiveness of local products. Therefore, in the case of a monetary union, the member countries whose competitiveness deteriorates cannot use the exchange rate to compensate for the decline in competitiveness. In this case, without budgetary support, they will have to compress domestic prices and domestic expenditure in order to compensate for the lack of exchange rate flexibility. This is called internal devaluation, more commonly known as ‘austerity’. — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 125

Categorization

• DEFINE: Defines ‘internal devaluation’ as austerity, the mechanism that replaces exchange-rate adjustment.
• XREF: Connects to modern eurozone debates about internal devaluation vs. currency depreciation for peripheral economies. — connects to: Fixed exchange rates force austerity when competitiveness declines; Gold standard currencies had fixed parities and central banks limited issuance to gold reserves — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 64; Devaluation and revaluation simply shift the fixed CFA-euro parity — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 122 (+7 more)

Related

• Fixed exchange rates force austerity when competitiveness declines (similarity 0.93)
• Devaluation and revaluation simply shift the fixed CFA-euro parity (similarity 0.84)
• Fixed exchange rates trade employment stability for external balance (similarity 0.83)
• Fixed and floating exchange rates operate by opposite logics (similarity 0.81)
• The euro institutionalized a gold standard, removing devaluation as a national adjustment tool. (similarity 0.80)
• Gold standard currencies had fixed parities and central banks limited issuance to gold reserves (similarity 0.79)
• Franc-zone central banks must restrict domestic credit to defend the fixed euro parity (similarity 0.79)

Broader Connections

• Fixed exchange rates trade employment stability for external balance #expands (0.75) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 295
• Franc-zone central banks must restrict domestic credit to defend the fixed euro parity #exemplifies (0.65) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 131