The exchange rate is an important economic lever, and its changes will have many important impacts on the national economy.
(1) Trade effects of exchange rate changes
The devaluation of the local currency is beneficial to a country to expand exports and restrict imports. This is the most important impact of depreciation, and it is also an aspect often considered by the monetary authorities of a country to lower the foreign exchange rate of its currency. But only after a long period of time, the import demand elasticity of the depreciating country will gradually increase, and its trade balance will be improved. There are four reasons for this: first, cognition lag; second, decision-making lag; third, replacement lag; fourth, production lag. The positive effect of currency depreciation is not long-lasting, and generally only lasts for 1 to 2 years.
(2) Capital flow effects of exchange rate changes
Under the premise that other conditions remain unchanged, a country's exchange rate decline can enable the same amount of foreign currency to buy more labor services and production materials than before, and can introduce more foreign capital inflows. If people expect a country's currency depreciation to be short-lived, it may attract long-term capital inflows to the country, because after the country's currency appreciates, its input will appreciate; The effect is just the opposite.
At the same time, when a country's currency depreciates, the relative value of financial assets measured in that country will drop, and people will exchange the country's currency for other countries' currencies, and a large amount of capital will be moved abroad to prevent losses; in addition, depreciation will also cause inflation. Expectations, that is, people expect the country's currency to fall further, causing speculative capital outflows.
(3) The effect of exchange rate changes on domestic prices
From the point of view of imports, the decline of a country's currency exchange rate will lead to an increase in the price of imported goods in its own currency and an increase in the price of similar domestic goods, causing cost-push inflation.
From the point of view of export, the decline of a country's currency exchange rate will lead to an increase in export volume. Under the condition that domestic production capacity has been fully utilized, this will intensify the contradiction between domestic supply and demand, and have a negative impact on the price rise of domestic finished products and related products. A lot of pressure.
From the perspective of currency issuance, currency depreciation can increase a country's foreign exchange income, and foreign exchange reserves will increase to a certain extent. The other side of the increase in foreign exchange reserves is that a country's central bank will increase the issuance of local currency of the same value, so the exchange rate depreciation will expand. The amount of currency issued in a country will also put pressure on inflation.
(4) Interest rate effects of exchange rate changes
Currency depreciation will encourage exports, increase foreign exchange income, and increase domestic currency investment; currency appreciation will reduce imports, reduce foreign exchange expenditures, and increase currency return. Therefore, currency depreciation will expand the money supply, cause the price level to rise, and cause the interest rate to fall, which will bring about the effect of inflation. However, inflation will cause the increase of money demand and the rise of interest rate. For most countries, the rise of interest rate always follows the depreciation of exchange rate.
(5) The effect of exchange rate changes on foreign exchange reserves If a certain reserve currency appreciates, the country holding the currency will increase its income, and the country that issued the currency will increase its debts; if a certain reserve currency depreciates, the country holding the currency will increase its income. The country that loses its currency suffers. Therefore, in the long run, changes in the exchange rates of reserve currencies can change the structure of foreign exchange reserve assets.
(6) Effects of exchange rate changes on national income and employment
Currency depreciation is conducive to the increase of exports, which will lead to an increase in domestic investment, consumption and savings; at the same time, the price of imports will rise, and some consumers will shift their expenditures on imported goods to purchase domestically produced goods, which will lead to an increase in exports. The effect is to increase national income. But the country cannot rely heavily on imports or scarcity of resources, otherwise the price of imported means of production will rise, which will increase production costs, reduce corporate profits, and lead to a decline in economic growth.
(7) The impact of exchange rate changes on international economic relations
Exchange rate fluctuations are two-way. A fall in the exchange rate of the local currency means an increase in the exchange rate of other countries’ currencies, which will lead to a deficit in the balance of payments of other countries and a slowdown in economic growth.
The external devaluation of a country's currency can only have a positive effect within a moderate range. If a country's currency depreciates too much, it will make investors lose confidence, which will have a negative impact and even lead to a currency crisis.
(8) The degree of impact of exchange rate changes on the economies of various countries
First, the greater the proportion of imports and exports in GNP, the greater the impact of the exchange rate on the domestic economy.
Second, the stronger the convertibility of the currency and the higher the rate of use in international payments, the greater the impact of exchange rate changes on the country.
Third, the higher the degree of a country's opening to the outside world, the deeper the degree of participation in the international financial market, the greater the impact of exchange rate changes on the country.
Fourth, the more developed a country's economy is, the more perfect various market mechanisms will be, and the wider the channels for speculation will be, so the impact of exchange rate changes on the country's economy will be greater.
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