Question

Explain the “Revaluation” and “Devaluation” of the exchange rate. How do they differ from the “Appreciation” and “Depreciation” of the exchange rate?

Answer 1

Under a fixed exchange rate system, currency  “Revaluation” refers to the increase in the value of one currency with respect to other currencies and “Devaluation” refers to the decrease in the value of one currency with respect to other currencies. In fixed exchange rate system, the government enters into open market operations to increase (revaluation) the value of the currency or decrease (devaluation) of the currency of the country to meet various macroeconomic objectives. Therefore, “Revaluation” and “Devaluation” does not take place because of the interaction of the demand and supply for the currencies of a country; rather, because of the active intervention by the central bank or the government.

Currency “Revaluation” and “Devaluation” takes place in a fixed exchange rate system. On the other hand currency, “Appreciation” and “Depreciation” takes place in the floating exchange rate system in which the value of the currency depends on the relative demand and supply for the currency. In a floating exchange rate system, when the value of a currency goes up relative to another currency or currencies, it is called appreciation. On the other hand, currency depreciation takes place when in a floating exchange rate system the value of a currency goes down relative to another currency or currencies. Currency appreciation or depreciation takes place in a floating exchange rate regime through the interaction of free market forces and not because of any government intervention.