Devaluation

Devaluation refers to the deliberate downward adjustment of a country's currency relative to other currencies, typically carried out by the government or central bank. Devaluation makes a country's exports cheaper and more competitive in international markets, while making imports more expensive. This can help reduce trade deficits and boost economic growth. However, devaluation can also lead to inflation, as the cost of imported goods rises. Devaluation is typically used as a tool by countries with fixed or semi-fixed exchange rate regimes to improve their trade balance.

Example

In 1994, Mexico devalued its peso against the U.S. dollar to address a balance of payments crisis, making Mexican exports cheaper but leading to inflation.