Currency Crashes: The Good, the Bad, and the Ugly

A blog about business and economics.
July 11 2012 2:08 PM

Currency Crashes: The Good, the Bad, and the Ugly

Broken euro
Broken euro

Photograph by Thomas Coex/AFP/Getty Images.

Countries generally only undergo a sharp devaluation in the value of their currency when something's gone badly wrong. That can make it difficult to distinguish, statistically speaking, from cases in which the devaluation per se was damaging and when the devaluation helped cushion the blow. But according to Joe Gagnon's 2010 paper "Currency Crashes in Industrial Countries: What Determines Good and Bad Outcomes?" a currency devaluation is almost never a cause of bad outcomes unless it's simply one part of a broader mosaic of excessive inflation:

Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always been followed by solid economic growth, rising asset prices and stable or falling inflation rates.
Advertisement

Tying this back to the eurozone crisis, one of the main economic policy objectives of elites in Italy and Spain was to commit their countries to a lower-inflation course by removing debt-monetization and currency devaluation as a policy option. And this has, indeed, worked in holding Spain and Italy to much lower inflation trajectories. But the cost is that they've abandoned the inflationary course in a way that's cut off the possibility of responding to rising unemployment or external deficits with currency devaluation. And right now that's proving exceptionally harmful. And it's not just high unemployment in the short term. Even pre-crisis, Spain was a less-educated, less-skilled, less-proserous country than Germany. Putting it through the ringer of a years-long span of 20-plus percent unemployment is going to lead to de-skilling of the workforce and sharply discourage the accumulation of  capital goods while failing to properly reward productivity enhancing management innovations.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Politics

Don’t Worry, Obama Isn’t Sending U.S. Troops to Fight ISIS

But the next president might. 

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.

How Much Should You Loathe NFL Commissioner Roger Goodell?

Here are the facts.

Altered State

The Plight of the Pre-Legalization Marijuana Offender

What should happen to weed users and dealers busted before the stuff was legal?

Surprise! The Women Hired to Fix the NFL Think the NFL Is Just Great.

You Shouldn’t Spank Anyone but Your Consensual Sex Partner

Moneybox
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
Altered State
Sept. 17 2014 11:51 PM The Plight of the Pre-Legalization Marijuana Offender What should happen to weed users and dealers busted before the stuff was legal?
  Business
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
  Life
Dear Prudence
Sept. 18 2014 6:00 AM All Shook Up My 11-year-old has been exploring herself with my “back massager.” Should I stop her?
  Double X
The XX Factor
Sept. 17 2014 6:14 PM Today in Gender Gaps: Biking
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
  Arts
Brow Beat
Sept. 17 2014 8:25 PM A New Song and Music Video From Angel Olsen, Indie’s Next Big Thing
  Technology
Future Tense
Sept. 17 2014 9:00 PM Amazon Is Now a Gadget Company
  Health & Science
Bad Astronomy
Sept. 18 2014 7:30 AM Red and Green Ghosts Haunt the Stormy Night
  Sports
Sports Nut
Sept. 17 2014 3:51 PM NFL Jerk Watch: Roger Goodell How much should you loathe the pro football commissioner?